Average True Range (ATR)

[brownsfan019]

In this thread, momentom brought up using the ATR as a trailing stop function and since I know literally 0 about the ATR and it's use, I thought we could have a discussion here about it and not clutter up the other thread.

Hopefully momentom can provide us some examples and I will do my best to interact as well.

Right now my questions would be what settings to set your ATR at, what number (if any) to multiply that number by (and why) and then how to use that in your trading? In my personal use, I am interested in using this as a trailing stop idea, but I'd like to hear if any are using this as a tool for entering trades as well.

[TinGull]

Its funny...just this morning Linnsoft introduced a new indicator called "Volatility Stop" and its inputs are exactly what momentom specifies. Weird how the universe works sometimes...

[Blu-Ray]

	Quote:	TinGull
	Its funny...just this morning Linnsoft introduced a new indicator called "Volatility Stop" and its inputs are exactly what momentom specifies. Weird how the universe works sometimes...

Tin

Would you mind posting the code or sending it in a PM so I could have a look

Cheers

Blu-Ray

[TinGull]

7. New Indicator: Volatility Stop. The Volatility Stop Indicator helps
define the current trend. The indicator plots a red line above the prices
bars when a downward trend is detected, and a blue line below the bars when
an upward trend is detected. These lines are commonly used as trailing
stops. This indicator is commonly used as a exit tool rather than an entry
technique. When price crosses the VSTOP value, the trend reverses and VSTOP
moves to the other side of price. The VSTOP is calculated as follows:

VSTOP Calculation

When Up Trend Detected....

VSTOP = CL - MULT * TR

As Up Trend Continues....

VSTOP = MAX(VSTOP.1, MaxCL - MULT * TR)

When Down Trend Detected....

VSTOP = CL + MULT * TR

As Down Trend Continues....

VSTOP = MIN(VSTOP.1, MinCL + MULT * TR)

Where...

CL = Closing Price

MULT = True Range Multiplier

TR = True Range

VSTOP.1 = Volatility Stop Value on Previous Bar

MaxCL = Maximum Closing Price since Up Trend Began

MinCL = Minimum Closing Price since Down Trend Began

Trend reverses between up and down when Closing Price crosses VSTOP.

RTL Token: VSTOP

The RTL Token for the Volatility Stop indicator is VSTOP. A common system
for trading the VSTOP might be to look for closing price crossing VSTOP:

Long...

CL > VSTOP AND CL.1 <= VSTOP

Short...

CL < VSTOP AND CL.1 >= VSTOP

More information on VSTOP can be found at:
http://www.linnsoft.com/tour/techind/vstop.htm

[TinGull]

thats all the info I have for it

[Blu-Ray]

Thanks Tin for posting that.

Cheers

Blu-Ray

[Dogpile]

here is what I have been using and its worked great... see attached chart for todays action.

logic was that if 3 ATR's is a good stop -- then entering on a pullback and using the 3 ATR stop rule will make risk less than 3 ATR's. I have been using 1.5 ATR's as my pullback zone.

So in the chart... enter on limit near the lowest yellow line price and put a stop loss in at the lowest red line price -- so your initial risk is roughly 1.5 ATR's (3.0 atr stop with 1.5 atr pullback for entry). This has been working well on a 2-minute chart for me. A good move really shouldn't break the 3 ATR level.

fyi, this has nothing to do with a set-up -- this is only the management of a trade once you have decided you like the pattern.

man, I am rarely this patient but I really felt like we were going to make a lower low in the afternoon today -- note that it took a full 45 mins before my stop was actually lower than my entry.... but I did get my 'risk' down to 1.5 ES pts after about 20-mins...

Easylanguage code for this indicator:

value1= c[1]+(avgtruerange(10)*1.5);
value2= average(c,2)[1]+(avgtruerange(10)*3);

Plot1(Value1, "+1.5 ATRs" );
Plot2(Value2, "+3ATRs" );

[markd85]

Hi Dogpile
Just wondering if you can share, why did you exit where the chart shows and not on the 3 ATR red line? Very nice trade. Thanks.
Mark

[Dogpile]

hi mark,

I exited there for a few reasons. Exits are generally much more complicated than entries but the concepts I was thinking about included:

1. my strategy is generally to look to enter somewhere not too far away from VWAP and find an exit once it has moved a good distance away from VWAP.

2. note that there was a 400 tick buy divergence on the push to 1451.00

3. I was looking for a lower afternoon low --- you can see that this objective was met.

net net, the market acheived my objective so I took the gain. waiting for the stop to get hit gives up too much IMO.

attached is the buy divergence and a very simple indicator I wrote that marks a dotted line at VWAP +/- 10.00 pts... sometimes it goes less, sometimes more.

hope that helps.

[momentom]

Good posts dogpile.

I started to use ATR trailing stops because I needed something that would adjust to market conditions.

The ATR stop, by its very nature, adjusts to the volatility of the market.

The use of the inputs 10 and 3 may be a bit arbitrary although the logic is that calculating ATR over 10 bars is short enough to reflect current market conditions but long enough to give a "fair" picture. I keep the stop away by 3 ATRs because I find it far enough away to not be stopped olut unnecessarily most of the time yet close enough to get me out early enough at the end of a move. You might want to try numbers between 2 and 4 ( say every 0.25) if 3 doesn't suit. I'd be wary of over optimisation.