# Average True Range (ATR) stops



## pavilion103 (24 February 2011)

I realise stops differ for every system but for a shorter term trader looking to be in positions from a few days to a few weeks what is a good multiple of the ATR to use as a stop? Is 2xATR to small (to avoid market noise)? What multiple is too large?

Also is there much difference using a multiple of the "ATR" as a stop and using a multiple of the "10 day Moving Average of the ATR"?
Are there certain benefits and negatives of both of these?


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## tech/a (24 February 2011)

Try parabolic SAR
or one of my favorites an MA of Linier regression.

Mov(LinearReg(Ref(LLV(L,3),-1),3),26,E);

Thats a metastock code.

Better still learn to read VSA much quicker and at the coal face.


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## pixel (24 February 2011)

pavilion103 said:


> I realise stops differ for every system but for a shorter term trader looking to be in positions from a few days to a few weeks what is a good multiple of the ATR to use as a stop? Is 2xATR to small (to avoid market noise)? What multiple is too large?
> 
> Also is there much difference using a multiple of the "ATR" as a stop and using a multiple of the "10 day Moving Average of the ATR"?
> Are there certain benefits and negatives of both of these?



 It depends on 


your time frame
your risk tolerance
the price level off which you draw the ATR Multiple
each stock's individual properties, which I call its DNA
I have developed a script and chart template, specifically adjusted to my style of trading and, more importantly, variable to test over various timeframes and stocks. When I look back over a charted history, I try to identify a template that leaves me in a trade where staying put is rewarding, while stopping me out where it ceases to be profitable. With a little bit of practice, I can detect at a glance whether the ins and outs (buy and sell arrows) are too close together or (would have) allowed reasonably-sized swing trades.
If I can't find such a pattern for a particular stock, I drop it as unrewarding and look elsewhere. Nobody says I *have to* trade stock XYZ.

The example below should be self-explanatory:


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## Wysiwyg (25 February 2011)

tech/a said:


> Try parabolic SAR
> or one of my favorites an MA of Linier regression.
> 
> Mov(LinearReg(Ref(LLV(L,3),-1),3),26,E);
> ...




This is my interpretation in Amibroker ... Moving Average of the Linear Regression using the Lowest Low Values with adjustable Parameters. The MS 'E' is not initialised  and is one too may arguments.  


```
MAr = Param("MA Range", 26, 5, 100, 1);
LLVr = Param("LLV Range", 3, 2, 100, 1);

Plot(MA(LinearReg(Ref(LLV(L,LLVr),-1),3), MAr), "MA of Linear Regression (LLV)", colorBlue, styleLine);
```


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## AlterEgo (25 February 2011)

Wysiwyg said:


> This is my interpretation in Amibroker ... Moving Average of the Linear Regression using the Lowest Low Values with adjustable Parameters. The MS 'E' is not initialised  and is one too may arguments.
> 
> 
> ```
> ...




Should be EMA instead of MA. Tech's one used an exponential moving average. The MetaStock's 'E' is for exponential.


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## tech/a (25 February 2011)

Yes thats correct an EMA

You can of course adjust your parameters to siut.


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## pavilion103 (17 October 2011)

I've been reviewing my recent trades and one thing that has caught my attention is how different stocks have different levels of volatility. Some of my stops can be 10% from entry but look visually so close on a chart to entry, whereas some stops may only be 3% but visually look too far away from entry. 

I guess looking at the chart you can get an idea of whether the stop is too far from entry but what are people's thoughts on the maximum distance a stop can be from entry (to still allow price to move into decent profit) in terms of ATR? Is 2ATR usually about right? 3ATR too far?


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## tech/a (17 October 2011)

pavilion103 said:


> I've been reviewing my recent trades and one thing that has caught my attention is how different stocks have different levels of volatility. Some of my stops can be 10% from entry but look visually so close on a chart to entry, whereas some stops may only be 3% but visually look too far away from entry.
> 
> I guess looking at the chart you can get an idea of whether the stop is too far from entry but what are people's thoughts on the maximum distance a stop can be from entry (to still allow price to move into decent profit) in terms of ATR? Is 2ATR usually about right? 3ATR too far?




*Pav*

In discretionary trading I only use an initial stop as a position sizing tool.
Rarely does this stop get hit before Ive moved it.

I want things to move in my direction in the first 3 trading periods---1 min (3 mins)
1 day (3 days.)
Ill do 2 things.
(1) If the move ---moves strongly in my favor Ill move to B/E.
If it moves slowly away in my direction Ill follow the stop up the below the next bars low.
(2) If it moves strongly away from me towards my stop then I'll raise the stop to the low(or high if short) of THAT BAR.
If it moves slowly towards my stop Ill leave it as is.

*The important thing to remember for me is*
FINAL R/R is based upon all of your trades.
While you may see initially a 10% stop only giving you a 3:1 R/R if it rises 30% remember that sitting there watching price fall 10% to that level when its obvious that its going to get taken out is plain crazy.
Personally I dont mind how often I get taken out at B/E and I never get frustrated with these trades NO MATTER HOW OFTEN THEY TURN IN MY DIRECTION AFTER STOP OUT.

Because I know that I will get those 50+ (often less) tick moves against my 8 tick average loss,often enough to make it worth my while.


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## tech/a (17 October 2011)

Then systems trading I have found the following.
3-8% is too close I found through many many tests that the stop meant that you were closed out too often.
8-12% was the sweet spot.
12-20% was too long as you found the system was locked in a lot of trades between buy price and stop level.

This is very different from discretionary trading as you are confined to the algorithms used in the system.
Each sequence must be satisfied in the chain of events for a trade to be taken and completed.


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## pavilion103 (18 October 2011)

tech/a said:


> Then systems trading I have found the following.
> 3-8% is too close I found through many many tests that the stop meant that you were closed out too often.
> 8-12% was the sweet spot.
> 12-20% was too long as you found the system was locked in a lot of trades between buy price and stop level.
> ...




This is interesting. I don't know a whole lot about systems trading at this stage (I might explore it at some point, I don't know).

For my discretionary trading the majority of my stops 5-10%. Probably a lot different to systems trading. A lot more discretion obviously to exit a position should it's activity show signs of weakness.


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## pavilion103 (18 October 2011)

tech/a said:


> *Pav*
> 
> In discretionary trading I only use an initial stop as a position sizing tool.
> Rarely does this stop get hit before Ive moved it.
> ...




I get the feeling that this post could be very beneficial for me. 

You hit the nail on the head for me with breakeven stops. I am implementing more of them but I have been getting annoyed when they move in my direction after being stopped out, so I look to see if there were other stops I could have used. But I know deep down the breakeven stops are a very good idea and I need to detach myself emotionally from what happens to the trade after I'm stopped out. 

I will test some of those other ideas for myself also. Gives me food for thought.


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## pavilion103 (18 October 2011)

tech/a said:


> *Pav*
> 
> In discretionary trading I only use an initial stop as a position sizing tool.
> Rarely does this stop get hit before Ive moved it.
> ...




I just wanted to confirm that when talking about the part I've highlighted above, you are saying this in relation to the first 3 trading periods?


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## Mistagear (18 October 2011)

pavilion103 said:


> I get the feeling that this post could be very beneficial for me.
> 
> You hit the nail on the head for me with breakeven stops. I am implementing more of them but I have been getting annoyed when they move in my direction after being stopped out, so I look to see if there were other stops I could have used. But I know deep down the breakeven stops are a very good idea and I need to detach myself emotionally from what happens to the trade after I'm stopped out.
> 
> I will test some of those other ideas for myself also. Gives me food for thought.




Pav, 

Bit of a different spin on where Techa has been heading you.

Food for thought anyhow.

Most stocks regularly swing 2x ATR even when trending. In strong trends you get repeating 2x ATR legs (Motorway's waves comment) punctuated with lighter retraces which are slightly less than 2x ATR.
You can measure these swings and subsequently gauge the continuing or lessening strength of the trend depending on how close the reversals are to the mathematical swing target created using an ATR multiple.
Now i realise you have been looking to trade breakouts, but if you look at these swings or waves, you may find advantage in entering a contrarian trade position once a swing has reached it's anticipated stretch in one direction in anticipation that a swing reversal is more likely to occur due to already being at a regular distance from the mean of the prevailing trend (if confirmed with additional analysis eg: a VSA signal of possible reversal or a candlestick reversal bar or divergence on a momentum indicator).
Stand back from the chart and you may see the swings of waves I speak of.
The essence is to enter with a stop at a fraction of the ATR and have a target on the other side of the swing and at least the normal 2x ATR swing.
If you trade in the direction of the dominant trend, you will find pullbacks greater than 2x ATR are rare where the trend continues, so an entry at the point where the counter trend has already extended to the norm allows for an attractive risk/reward ratio, and one which is realistic in both stop and target.
If a trend has been in progress and suddenly produces a counter move greater  than your measured 2xATR (close) then I look for a weaker next swing (in the direction of the trend) for a possible signal of dominant trend reversal.


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## pavilion103 (19 October 2011)

Mistagear said:


> Pav,
> 
> Bit of a different spin on where Techa has been heading you.
> 
> ...




Thanks for the response mate. 
I'm not sure if you've seen some of my other posts but I have been saying that I don't think trading only breakouts is sufficient for me. I read a Wyckoff book recently and he outlines how to enter long positions on pullbacks during an uptrend and enter shorts in the opposite manner in a downtrend. 

As you mentioned important to confirm with additional analysis to ensure it looks like a good opportunity. 

I've been testing some of this and trying to get a feel for it. 

I'm still a little uncertain with my stops, just how tight to put them. I know these trades offer really good low-risk entries but I definitely need improvement with placing my initial stop so that I can capture solid 3:1 R:R moves.


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## tech/a (19 October 2011)

*Mistagear*

Has some good points.
Along the same lines you may wish to view charts from post 638 forward
where I demonstrate T/Gs method of short term trading the SPI.
*Low risk high win rate.*

https://www.aussiestockforums.com/forums/showthread.php?t=22820&page=32



> I'm still a little uncertain with my stops, just how tight to put them. I know these trades offer really good low-risk entries but I definitely need improvement with placing my initial stop so that I can capture solid 3:1 R:R moves.




Only a problem if you keep getting knocked out *BEFORE* you can get it to B/E.
In which case you bleed small losses.
If that keeps happening then your not getting on momentum ---or your not recognising *pending* momentum setups---in which case your entry needs to be re looked at.


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## pavilion103 (19 October 2011)

pavilion103 said:


> I just wanted to confirm that when talking about the part I've highlighted above, you are saying this in relation to the first 3 trading periods?




This one is from post #12. Still not 100% sure what you mean by this. 

So if you enter at say, $5.00 with a stop at $4.75:

*Scenario 1*If day one: high $5.10, low $4.95 - move stop to $4.94
If day two: high $5.25, low $5.10 - move stop to $5.09
If day three: price drops below $5.09, your position is stopped out? (0.4R gain)

*Scenario 2*
Whereas if price shot up day one to, say $5.35, then you'd move your stop to b/e?


I really want to make sure I understand what you mean here. Does my scenario one show a correct understanding?

So it basically either takes off within the first 3 days or it is often stopped out without any/much damage done?


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## pavilion103 (19 October 2011)

One more Tech

Scenario 3
If day one: high $5.00, low $4.95 - leave stop at $4.75
If day two: high $5.10, low $4.95 - move stop to $4.94 
If day three: price drops below $5.94, your position is stopped out (close to b/e)

Obviously this deals with price going down day one the back up. Is it still trailed below the low of the first day that moves up?


I'm not trying to get too caught up on these specific details Tech, thinking it is th eholy grail. But if I can understand exactly what you means then obviously I can apply specific things to my testing and derive my own conclusions.


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