Average True Range (ATR) Trailing Stops

Average True Range ("ATR") was introduced by J. Welles Wilder in his 1978 book New Concepts In Technical Trading Systems. ATR is a measure of volatility for a stock or index and is explained in detail at Average True Range. Wilder experimented with trend-following Volatility Stops using average true range. The system was subsequently modified to what is commonly known as ATR Trailing Stops.
ATR Trailing Stop Signals

Signals are used for exits:

    Exit your long position (sell) when price crosses below the ATR trailing stop line.
    Exit your short position (buy) when price crosses above the ATR trailing stop line.

While not conventional, they can also be used to signal entries — in conjunction with a trend filter.
Example



The RJ CRB Commodities Index late 2008 down-trend is displayed with Average True Range Trailing Stop (21 days, 3xATR, Closing Price) and 63-day exponential moving average used as a trend filter.
RJ/CRB Index with ATR trailing stops

Mouse over chart captions to display trading signals.

    Go short [S] when price closes below the ATR stop — while below the 63-day exponential moving average
    Exit [X] when price crosses above the ATR stop

ATR Trailing Stops Setup

Typical ATR time periods used vary between 5 and 21 days. Wilder originally suggested using 7 days, short-term traders use 5, and longer term traders 21 days. Multiples between 2.5 and 3.5 x ATR are normally applied for trailing stops, with lower multiples more prone to whipsaws.

The default is set as 3 x 21-Day ATR.

Closing Price is set as the default option. The alternative is HighLow (see Formula below).