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ATR Volatility based Stop Losses

The Welles Wilder ATR Stop Loss System

Notice:  This software is not available at this time.  This page has been taken off-line and search engines should not be displaying it in search results.  However, we do offer a stop loss service based on the ATR.  We [rovide a downloadable spreadsheet in which you define parameters and the ATR stop loss is calculated for thousands of stocks.  Learn more at    http://www.stockdisciplines.com/ATR-Stops

The Average True Range (ATR) is the average of the True Range over a given period. It is a measure of volatility first introduced by J. Welles Wilder in his book, New Concepts in Technical Trading Systems. Wilder recommended a 14-day average of the True Range.  The "True Range" tends to reflect the commitment or enthusiasm of traders. For example, if traders are willing to keep bidding up or selling down a stock throughout the day, then ranges will tend to be large or increasing. Conversely, if there is a lack of interest, ranges will tend to be small or decreasing.   Thus, according to Wilder, large ATR values tend to occur at market bottoms after a panic sell-off (volatility is high).  Small Average True Range values tend to occur when volatility is low. An example would be during times of prolonged sideways movement (as when a market is topping out or undergoing consolidation). Wilder developed a special way of computing the ATR. Our algorithm calculates the Average True Range the same way J. Welles Wilder calculated it. Not all programs or services use his method, even though they claim to be calculating the ATR. For example, some programs use the simple or exponential moving average calculations commonly used in charting programs because they are simpler than Wilder's formulas, but that means the stop losses they calculate are not the same as Wilder would use.  Our algorithm implements Wilder's formulas in calculating the Average True Range.

Most successful traders use stop losses. Most will also agree that stop losses that factor in the volatility of a stock are the best to use when there is no clear indication of a nearby support level on the chart. Stop losses based on the Average True Range (ATR) of a stock are volatility-based stop losses. We provide the Average True Range for over 5000 stocks through our ATR Stops subscription. Since we do the computing for you, you don't have to do the math. We also provide the maximum ATR for the last 5 days, the maximum ATR for the last 10 days, and the maximum ATR for the last 15 days. To get the data, a subscriber simply goes to the Subscriber's Section of the site, clicks on the "ATR Stops" link, and opens a spreadsheet. Over 5000 stocks are listed by name and symbol, but arranged in alphabetical order by symbol. Simply scan down the list, find the symbol for the stock of interest, and write down the ATR data for that stock.

The Database Used
We suse the same list of stocks that we use for other subscriptions services.  Here is how it is created.  We start with more than 8,000 stocks listed on the NYSE, ASE, and Nasdaq.  Then, we filter this list before we use our algorithms to generate the various lists we provide to subscribers.  Why?  In a  list of 8,000+ stocks there will be a large number of stocks trading only a few shares a day.  For example,  a stock might undergo a Bollinger band squeeze and a volume surge of 100% on its penetration of the upper Bollinger band.  Suppose it is a $5 stock with daily trading volume of only 900 shares ($4,500).  It would be a bad move for a subscriber to try to invest $5000 or even $2000 in a stock that trades only $4500 in a whole day.  The problem is that the existence of such stocks in our database would displace a stock that traded $5,000,000 a day with a volume surge of 50%.  The latter might easily be pushed below the cut-off point for our list.  To help with the liquidity issue, we now take the closing price and multiply it by the 50-day average daily volume and use $500,000 as the cut-off point.  Using that measurement (calculated during the most recent week), we filter out stocks that trade less than approximately $500,000 (an approximation of the daily dollar amount traded).  This filtering is intended only to reduce the the number of higher-quality stocks that are replaced by stocks of much lower quality in our reports.  The number of stocks that make the cut changes somewhat from week to week, but we can safely say that more than 5,000 stocks qualify.  [Note: It is still your personal responsibility to check the liquidity of a stock relative to the intended size of your trade before you buy it to make sure you are making an investment that is suitable for your purposes and for your tolerance for risk.  Of course this may not be an issue if you invest less than $5,000 per position, but that is something that must be determined by you.  We do not make stock recommendations.]


Some trader/investors subtract the ATR from the highest high reached by the stock since its purchase and others subtract from the highest close or from the highest low since purchase. Some use the ATR itself, and some multiply the ATR by a preferred multiplier. Your tolerance for risk and your preferred investment time-horizon will have a big impact on the settings you use. For example, if your goal is to capture most of a 1-month move, your stops will be much closer to the current stock price than if your goal is to capture most of a 6-month move. The potentially much greater returns of shorter-term investing come at the cost of greater trading activity. Longer-term investing will generally require less trading activity and allow more downside volatility (greater risk). The trade-off in using this more “relaxed” approach is the high liklihood of a significantly smaller return. Thus, a person interested in a short-term time horizon might use the ATR without a multiplier, while somebody with a longer time horizon might use 1.25, 1.5, 2.0, 2.5, 3.25, 3.5, or some other figure in between any of these as a multiplier (as in 2.35 x ATR).  As you can see, the number of ways the ATR can be used is infinite, and you can use it in a custom-designed way to suit your personal tolerance for risk.


The ATR Lab

So you can get a “feel” for how various settings affect the stop loss, we have provided a "Lab" where you can experiment to find the settings that best suit you and your investment strategy.  We suggest that you spend a little time conducting experiments here before you implement your stop loss strategy on real positions.  We searched for stock charts to use in the "Lab" that have sufficient twists, turns, and trends to enable you to evaluate different combinations of settings.  We have provided five charts in the lab and arranged them vertically.  You can see more than 5 years of charted price action by scrolling down.

In the "LAb," the stop loss follows the stock as it rises and falls.  The stop is traced in red.  From any theoretical “buy” point, you trace the progress of the red line relative to the price action of the stock.  The stop will be triggered whenever the stock’s low price falls below the highest price reached by the red line since the theoretical buy point.  To avoid having a position sold because of an intra-day spike, some investors use “mental stops.”  They wait to see if the closing price is below the stop line because they believe that where a stock closes is more important than what it does during the day.  The tradeoff is that waiting for the close can result in a larger loss.  In the lab you can study how your settings influence end-of-day stops by simply noting whether the stock’s closing price on the day of a decline is below the highest point reached by the red line.  The ATR Lab is not part of a subscription by default.  It must be chosen as an option when ordering an ATR Stops subscription.  A person does not have to subscribe to ATR Stops to order the use of the tool, but ordering the tool separately will cost more.  The tool will work for 6 months.  If you order it for a year or more, the tool will still stop working after each 6 month period and we will send a new copy that will work for the following 6 months.  Better stop loss placements can easily translate into far more in profits and savings than the price of a subscription.  Even one well-placed stop loss might save many times the price of a i-year subscription.

You must be able to open and use an Excel 2007 spreadsheet with macros (.xlsm files) on your computer to be able to use the ATR Lab.  To test your system, click on the following link.  It will take you to a page where you can download a small Excel spreadsheet with a macro (the ATR Lab has a few macros).  If you can enter a number and cause the macro to work and the spreadsheet to recalculate and if your system can pass the macro test provided, then you should have no trouble using the ATR Lab on your system.  Go to the test page

Other Stop Loss Related Information On This Site

Stop Loss "Psych-Outs" Stop Losses and the 4-week Rule
Stop Losses and Probabilities Stop Losses and Risk Control
Stop Loss Relation to Diversification Stop Loss Long-Term
Stop Losses Getting Triggered Stop Losses and "Normal Fluctuation"
Stop Loss Information Stop Loss Tool

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