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ATR STOP LOSS INDICATOR

Today we show how to use the ATR indicator to calculate your stop loss. Average True Range (ATR) indicator calculates the average candles ranges over a specified period.

So ATR measures volatility and also includes any gaps in the price movement. Typically, the ATR calculation is based on 14 periods.

ATR to calculate the Stop Loss

Every time you are choosing your entry size, you need to take into account the price volatility.

Remember that the ATR calculates only the historical volatility and that it can’t predict the future. You also have to consider that generally, volatility is mean-reverting.

First of all, we have to figure out the correct indicator length.

As you can see, with a short ATR period, the indicator became too erratic. Generally, we use the 20 periods in a daily chart instead of the 14 periods.

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Charting the Average True Range StopLoss

Charting the Average True Range is very useful for every trading strategies.

You can use this indicator to set three different “visual stoploss” levels; you can use this to trailing your position.

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SUPERTREND evolution indicator

A useful indicator that is based on the Average True Range is the SuperTrend Indicator.

The difference is that the SuperTrend is based on average prices.

How to calculate the position size using ATR Stop Loss

The last step is to calculate your entry size. Before calculating it, we need to decide our stop loss in money.

For example, we have a 20.000$ account, and we would like to risk only 200$ for trades, how many shares can we buy?

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With this Excel Spreadsheet, you can easily calculate your stoploss based on ATR.

As you can see in the spreadsheet, there are three different StopLoss:

– 1° = Low Price – Average True Range

– 2° = Low Price – Average True Range x 2

– 3° = Low Price – Average True Range x 3

Download our FREE ATR StopLoss Calculator for Excel file.

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Excel to calculate the stoploss based on Average True Range

The spreadsheet also calculates the number of share-based on the maximum stoploss in dollar or the number of Lots for forex traders.

How to identify the volatility phases in a trading system?

You are using this method, when volatility increase, your position decrease. Generally, it’s correct.

But what’s happening before a strong breakout? The volatility became very low, so your position could be more significant than average at the moment of the breakout.

You are entering a storm with a large position, and it’s dangerous. You can reduce this problem by increasing the length of the Average True Range.

Another solution can be to use different multiplier ATR for different volatility phases.

To do this calculation, we need to compare the actual ATR with the older values. For this purpose, the trading system needs to analyze two different ATR periods, for example, 20 and 60.

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ATR with VOLATILITY PHASES

When the ATR 20 is over the ATR 60, the volatility is high (red color), in this scenario, the multiplier is ok.

When the ATR 20 is under the ATR 60 the volatility is low (green color), there isn’t the multiplier.

Consequently, you have a system that decreases your market exposure more when the volatility is high, that’s correct. But remember that when volatility is too low the breakout could be near and you should decrease your position size.

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