The ATR (Average True Range) Trailing Stop indicator provides recommendations on trailing stop levels for exiting trades.
It is designed to help you hold a position for as long as possible without getting out of it too early due to the volatility inside the bar. Based on the values of the average true range over the last few bars and the current price action, the indicator draws a steadily rising line below the current price for rising markets and a steadily declining line below the current price for falling markets. These levels are the recommended trailing stop levels, and when these lines break, it is recommended to exit positions.
The indicator calculates the average value of the true ranges (true maximum minus true minimum, i.e. including any gaps) for the number of the last bars specified in the settings. After that, the stop level is set to the highest maximum for these bars minus the x ATR coefficient for the ascending trailing stop and plus the x ATR coefficient for the descending trailing stop. The third parameter can provide a strictly increasing (decreasing) stop level.
Thus, in volatile markets, the estimated value of the ATR is high, so the stop level is located far enough away from the current price so that it does not work too quickly. In calm markets, the stop level is closer. The stop level will follow the market trend, as it is based on the highest high (lowest low) for the period.
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The indicator is not usually used for entering trades, but it is useful for setting a trailing stop for positions.
- Number of Bars used for ATR Calculation – the number of bars used for ATR calculation. The default is 21, suitable for the average trading range, but you can experiment with lower values, for example, 14
- ATR Stop Multiplier-ATR coefficient for stop levels, by default-3
- ensure no retreat of stop levels-prohibit the retreat of stop levels, this ensures that the trailing stop lines move strictly in one direction. By default, true. When set to false, there is a so-called “suspended stop” (Chandelier Stop), but some do not like trailing stop indicators that recede or redraw.