Manage your trades and define trends using ATR tracking stops | chart of art

As the name suggests, ATR tracking stops are typically used to track stop losses on long positions. It can also be used to identify large declines that could reverse an upward trend. Today’s example shows how to apply an ATR tracking stop on a breakout and use it to define the current uptrend in the technical SPDR (XLK).

ATR is the Average True Range, a volatility indicator developed by J Wells Wilder. The bottom display window shows an ATR (22) of 3.091 for the technical SPDR (XLK). The green line on the chart is the ATR trailing stop (5 x ATR(22)). 5 is the multiplier. This means that the value of ATR(22) is 5 ATR(22) below the highest close since November 6, when XLK occurred. As the price rises, this stop tracks the price higher and always maintains a value of 5 ATR(22) below the highest closing price of the move.

Why did you choose 5 as the multiplier? At the time of the breakout, I chose 5 as the multiplier. Because this value sets the initial stop just below the late October low (gray line). This is a natural level to set a stop because it represents a support level following a lower reaction. This indicator is part of the TIP Indicator Edge plugin for StockCharts ACP.

ATR trailing stops can also be used to define an uptrend. There have been two sharp declines during the current rise. Shades of red in early January and late February indicate this downward trend. In both cases the ATR Trailing Stop was maintained. This means that the pullback was less than the value of 5 ATR(22). A pullback breaking the ATR trailing stop would be greater than the value of 5 ATR(22) and this would be a massive pullback. Trend changes often occur with big moves, so I will be watching the ATR Trailing Stop going forward.

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