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ATR Stop Losses

ATR Stop Losses

ATR Stop Losses
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Average True Range Stop Losses

The True Range tends to reflect the commitment or enthusiasm of traders/investors. For example, if people 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.

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.  Not all ATR stop loss calculators on the Internet use the same equations Wilder used.  They often use a simple moving average or some other method of averaging, primarily because they are simpler.  In other words, they do not come up with the same figures that Wilder would have derived for his stop losses.  He created a very specific procedure for computing the True Range and for averaging it.  The algorithm that generates stop losses for this subscription uses Wildar's procedure. 

The following True Range illustration has already been given on another page of our site that links to this page, but it is repeated here for those who come directly to this page from the Internet rather than from that page of our site. 

The True Range is the largest of the four following calculations :

    Most recent day's high minus the most recent day's low
    Absolute value of the most recent day's high minus the previous close (see "A" below)
    Absolute value of the most recent day's low minus the previous close (see "B" below)
    Absolute value of the most recent day's high minus the previous close (see "C" below)

Greatest of Three

Absolute values are used because direction (+ or -) is not important.  Wilder wanted only to calculate the distance between two points.

From the above, you can see that the ATR is a very conservative measure of the average change in price from one day to the next.  What we mean is that the ATR does not take the actual change in closing price each day and average those changes.  Instead the ATR is determined by computing the maximum of several ranges from one day to the next.  This range is generally greater than the actual change in closing price and it even factors in any price gaps from one day to the next.

To calculate a 14-day Average True Range (ATR), for example, a person would make the above calculation for each of the most recent 14 days of price action and then average those computations.  An ATR calculator would require that you enter the high, low, and close for each day of the last 14 days for each stock.  With this subscription, that is not necessary.  We compute the ATR for thousands of stocks for you each day when we update our site.  After we update the site, you download the calculator and the ATR data is included for all the stocks in the database (described below).  All you have to do is look up the stop loss in a table after you enter your preferences.

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-adjusted stop losses.  With this service, it is easy to generate a stop loss based on the 5-day, 7-day, 14-day, and 21-day Average True Range.  Since we do the computing for you, you don't have to do the math.  To get the data, a subscriber simply goes to the "Subscriber's Section" of the site, clicks on the "ATR Stops" link, and then opens a spreadsheet.  He indicates the period over which the ATR is to be calculated, enters an "H," "L," or "C" for high, low, or close, and enters his multiplier of choice.  Thousands of stocks are listed by name and symbol, and arranged in alphabetical order.  A stop loss is calculated for each stock for both long and short positions based on the choices made.  He would simply scan down the list, find the stock of interest, and note the stop loss for that stock. 

Say, for example, that you bought XYZ Corp at $32 and that you want your stop loss to be 1.75xATR points below the highest high since your purchase. You would enter "H" to indicate "High," enter 1.75 for the multiplier, and then enter the period over which you want the ATR calculated.  Finally, you would scroll down the list and find the stock of interest.  The ATR used and the stop loss calculated will be displayed for both a long and short position.

The Database
We start with a Reuters database of over 8,000 stocks. We remove all preferred issues because of the difficulty of finding charting sites where they can be charted (because of their unusual symbols). If the company has preferred shares, it is extremely likely that they also have common shares for which it is easy to obtain a chart.  Also, we believe common stock to be a better trading vehicle.  We then delete all stocks that did not trade on the most recent trading day.  Stocks that did not trade on the most recent trading day may be having troubles with regulators or exchanges. They also may have stopped trading altogether but remain in the database because Reuters has not yet removed them. In iny case, we prefer to avoid stocks having difficulty staying listed or that cannot maintain daily activity/liquidity.  After the filtering, we are generally left with a database of more than 6,000 stocks.  We review and update the database (using the above procedure) daily.  When the database is updated, stocks previously deleted may be included again if the problem that caused their deletion has been corrected.  Because some stocks that are included in the final version of the ATR Stops database trade only a few shares a day, you must check the daily volume of a stock to make sure it has sufficient "liquidity" for the trade you wish to make.  Most esperienced traders avoid stocks that do not daily trade at least 100 times the number of shares they want to buy.  Many have much stricter requirements. 

   ATR Stops Image 

When our Website is updated, the calculator algorithms are also updated. Therefore, all the user has to do is download an updated version of the calculator from our server each day. This generally requires less time than downloading new data into a stand-alone program.

Determine Your Settings

You can get a general impression of the effect of various settings by reviewing the charts on the "  ATR Stops " page  of our Website. The following paragraph gives an example of how to set the parameters of a stop loss calculation more precisely. 

In this example, let's assume you want to use 14 days in calculating the Average True Range (ATR). Let's also assume that you will be placing a stop order to sell with your broker. In that case, you will compute your stops relative to the stock's low rather than relative to its close or high, because it is an intraday downward spike that will trigger your stop loss. If the stop is a "mental stop" and not placed with the broker, then you might use the high or close. However, a "mental stop" will not sell your shares automatically when your stock hits your stop loss price. Given the above, you will enter "L" (for lows) in cell C-1 and 14 (for 14 days) in cell C-2. Now, all you have to do is determine what to enter in cell C-3 (the multiplier for the ATR).  Look at a chart of any stock that is in a rising trend. Ask yourself where you would want to sell if the stock started to decline. Since there is never a guarantee that a stock will rebound any time soon once it starts to decline, the more you allow a stock to decline before selling, the more risk you tolerate. On the other hand, you do not want to sell too quickly or unnecessarily. Just enter various numbers in cell C-3 until the calculator gives you the sell point that suits your tolerance for risk. The settings you have chosen will then be applied to all the stocks in the database, and the stop losses calculated for all of them will be based on the volatility of each stock.  You would use the same procedure for short positions, but you would reference a stock's high rather than its low, etc. 

Operation Review

If you have seen descriptions of, or if you have used our previous stop loss calculators, you should know that there is a significant difference between those calculators and this calculator.  Those calculators required that the user enter the Date, Open, High, and Low, and Close data for each stock being tracked.  With this calculator, that is not necessary.  This calculator automatically updates the data and also computes the 5-day, 7-day, 14-day, and 21-day ATR for over 6,000 stocks.  All the updating takes place when our Website is updated.

ATR Stops will calculate volatility-based stop losses in reference to the stock's high, low, or close. To "tell" ATR Stops which approach you want to use, simply enter "H," "L," or "C" in cell C-1.

ATR Stops can calculate stop losses based on the most recent 5 days, 7 days, 14 days or 21 days. Just enter your chosen time period into cell C-2.

You can "weight" the ATR by using a multiplier. For example, a person screening candidates for a high-tech position might want to select only those people who have an IQ that is 2 standard deviations above the norm. The most popular IQ test for adults has a standard deviation of 15 points with the norm set at 100. Therefore, those that have an IQ two standard deviations above the norm have an IQ of 130. The ATR Stops calculator uses the ATR rather than the standard deviation, but the ATR measurement of stock volatility can be multiplied in the same way. In ATR Stops, the multiplier does not have to be an integer. For example, 1.35, 2, 2.46, 3, 1.9, and .82 could all be acceptable entries for cell C-3.

When you enter your settings for calculating the ATR stop loss, the calculation will be applied to all stocks in the database (see rows 9 to 6000+) in your downloaded spreadsheet. Since it is highly probable that all stocks in your portfolio are included in this database, your chosen parameters will be most likely be applied simultaneously to all the stocks in your portfolio. You can then scroll up or down to find the stop loss setting for each of your stocks.

However, it is not necessary to scroll. For example, you may enter a stock's symbol in cell D-1. The settings for that stock will appear in the light blue strip in rows 6 and 7. If nothing appears, it means the symbol entered is not recognized by the calculator. Scroll down, find the stock, and note the symbol used by the calculator. Enter that symbol, and the data will appear in the blue strip. The calculator sometimes requires an extender. For example, it will require the symbol for Intel to be entered as INTC.O rather than as simply INTC. The ".O" means it is listed on the Nasdaq. Sometimes the calculator requires a ".K" (for some, but not all, NYSE listed stocks). For example, a stock with a 4-letter symbol that is listed on the NYSE would require a ".K" extender, but stocks like IBM do not usually require an extender. "Pink Sheet" stocks require a ".PK" extender.

Each day, before you download the ATR Stops calculator, check the "Stock Market Review" page of our site to see if the current date is posted in the first paragraph under "Comments." If that date is not current, the calculator has not yet been updated. You can also check the date in cell C-4 of the calculator.  The data used by the calculator was accumulated after the close of market on the date posted in cell C-4.

This tool is extremely easy to operate.  It is fast, does the calculating for you, and uses Wilder's equations for calculating stop losses.

For more on ATR Stops, go to Stop Losses and to ATR Stops To use this service, you must be able to open and use an Excel 2003 spreadsheet.  We use the older version of Excel so that people with older versions of Excel can use the tool.  Those with later versions of Excel should also be able to use the older spreadsheets.  Older versions of Excel cannot work with spreadsheets created in the newer formats of the latest versions of Excel.  To download a small Excel 2003 test spreadsheet, click on
 Get Test Spreadsheet 


IMPORTANT NOTICE.  We cannot assume responsibility for the way you use our data.  Also, though we believe the data we provide is accurate, we do not guarantee its accuracy.  Read our Terms of Use

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