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ATR Volatility based Stop Losses

ATR Stops calculates stop losses based on the Average True Range (ATR) of a stock. These are volatility-based stop losses.  It will also compute and display daily True Range measurements.  It doesn't require any advanced math on the part of the user.  You only have to enter the stock's date and price data and the numbers 1, 2, or 3, to tell ATR Stops how to compute a stop loss.  Stop losses can be computed relative to the high, low, or closing price.  

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.  

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.  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).

Stocks will sometimes gap up or down.  A volatility formula based only on the high-low range would not accurately capture volatility when gaps occur.   Therefore, Wilder developed a special procedure for computing the ATR that can capture this “missing” volatility.

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 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.


Our ATR Stops calculator uses the same approach to data "smoothing" as that specified by Wilder's formula. Many if not most ATR calculators use a smoothing approach that was not recommended by Wilder. They may be quick and simple ways to average, but those procedures were not recommended by Wilder.

The Average True Range measures how much fluctuation or "noise" there is in a trending stock's behavior.  If a person wants to place his stop loss outside this envelope of noise, then he will multiply the ATR by a factor greater than 1.  For example, he may multiply the ATR by 1.5 and use the result to calculate his stop. This would help prevent getting stopped out prematurely and will also limit his risk in the trade.  Some will prefer a stop that is a greater distance outside the noise envelope and multiply the ATR by a number greater than 1.5.

Most successful traders and investors 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.  The "standard" approach is to subtract the ATR (usually multiplied by a "weighting" factor) from the highest close since purchase, but there is wide variation in how the ATR is used.  Some trader/investors subtract the multiplied ATR from the highest high reached by the stock since its purchase.  Others subtract it from the highest close or from the highest low since purchase. Some use the ATR without using a multiplier. Your choice of multiplier will be determined by your tolerance for risk and your preferred investment time-horizon.  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 but returns come at the cost of more downside tolerance (greater risk is tolerated). The trade-off in using this more “relaxed” approach is the likelihood of a significantly smaller return. Each individual must decide where his own "sweet spot" is regarding activity level, potential return on investment, and tolerance for risk.  Thus, a person interested in a short-term time horizon might use the ATR without applying a multiplier, while somebody with a longer time horizon might multiply the ATR by 1.25, 1.5, 2.0, 2.35, 3.25, 3.5, or some other number.  As you can see, the number of ways the ATR can be used is infinite, so you can use it in a custom-designed way to suit your personal tolerance for risk.  The best way to determine the magnitude of the multiplier that fits your objecteive and tolerance for risk is to experiment with different settings in the LAB (more on the LAB later).


Users of ATR Stops do not have to know Wilder's formula or how to calculate ATR the way he did, because the program performs those calculations automatically.  All the user has to do is enter a "multiplier" like 1.5 or 2, and the numbers 1, 2, or 3 in various cells in order to tell the program what to do.


Data is entered vertically by date in up to 100 rows. This provides room for about 5 months of data. If the user wants to track a stock longer than for 5 months, he can simply copy the last 20 days worth of data from the bottom to the top, delete the rest, and continue from there. [NEVER use "Cntl+X" key combination to copy because that would permanently damage the program.  Instead, use the "Ctrl +C" key combination to copy.  The data at the bottom must be copied and pasted at the top.  Then, the old data can be deleted with the keyboard delete key, but NEVER with the delete function on the Edit menu]  Thus, a stock can be tracked for years if desired.  ATR Stops is configured so it can track up to 15 stocks simultaneously.      

Note the layout of rows 4 and 5 for columns A through I.  Cell D-4 is where a person can enter a "Multiplier."  For example, if a person wants computations to be based on twice the Computed True Range, he or she would enter 2 in cell D-4.  It is also possible to enter decimals.  For example, if a person wants calculations to be based on 1.25 times the computed True Range, he or she would simply enter 1.25 in cell D-4.  

ATR Stops incorporates tremendous flexibility in its design.  For example, a person who is "long" a stock would enter the number "1" in cell D5, or he would enter a "2" if he is short the stock.  If the user enters "2," then the program would add the ATR to the lowest high, low, or close reached by the stock since its purchase. 

For example, if person wants to instruct the program to subtract the ATR from the highest high reached by the stock since its purchase, he can do so by entering the number "3" in cell B-5 (second column, fifth row).  To subtract the ATR from the highest low reached by the stock since its purchase, he would enter "1" in B-5, and so on.  ("1" means low, "2" means close, and "3" means high).  Column "L" rows 10, 11, and 12 lists these options as a reminder to the user.

If the user does not want to see the red-letter alerts "Sell Alert!" and so on that appear in column H, he can enter the number "3" in cell D-5 to turn that function off.  The stop losses will still be generated but the red notices will not appear.

Column I shows the stop loss setting.  If a person is long, the stop loss will trail the stock up as the stock climbs.  New stop loss settings will appear only if they are higher than the previous stop loss setting.  This makes the output less confusing than if every computation were displayed.  The latest stop loss showing will be the highest stop loss since the first date of data.  The same thing is true for short positions, but in reverse.  That is, if you are short a position, the result of the latest calculation will show only if it is lower than the lowest stop loss before that calculation.  For example, if the stop loss has not risen for 5 days, the last stop loss showing will be the one computed 6 days ago.  That way, you don't have to search through all the computed stop losses to find the highest one.  It will be the last one showing.  The old stop loss will still show, but the last one showing will always be the latest and highest (or latest and lowest if calculations are for a short position) . 

Sometimes a person will want to see the actual True Range calculations.  To do this, he would enter the number "1" in cell D-4 and the number "1" in cell F-5.  The entry "1" tells the program to display the True Range.  The number 1 is entered for the "Multiplier" so that the program will display the basic True Range.  If you want to see 1.5 times the True Range, you would enter 1.5 in cell D-4.  If you delete the entry in cell F-5, the data displayed in column "G" will vanish.

ATR Stops employs thousands of equations to make calculations whenever data is changed, and many of these are dependent on the output of other equations.  All equations are recalculated even if a change modifies the output of only one equation.  However, instead of making the user wait for calculations to finish every time data is entered or changed in a cell, ATR Stops will not recalculate until the user presses the f-9 key.  Then, all calculations will be completed at the same time.  To save time and to work more efficiently, we recommend that users make all entries and changes for all stocks before pressing the f-9 key.  Some computers require the user to press the "fn" key while pressing the f-9 key.  

When you open ATR Stops, you may see something that resembles the following image.  Click on "Enable automatic refresh."  If you do not click on "enable," Stops will not work. 

         



When the calculator is opened, you will see something resembling the following image.  The image shows what it looks like the first time you open it.  After the first time, codes will be in the goldenrod cells in column "L."  Note that each row of the spreadsheet is numbered and each column is identified with a letter.  Just above the letters that label the columns, instead of  "ATR Stops (Compatibility Mode) - Application" or some other message, there may be a message that says, "Security Warning  Data connections have been disabled" followed by a box labeled "Options."   If you see this, please click on Options and then "Enable."  

Note: NEVER delete or enter anything in any of the cells in rows 1 through 6 unless the cells are goldenrod in color.  Cells that are not goldenrod in color have hidden formulas that would be damaged if they were deleted or something is pasted over them and saved.  The functionality of those cells would be destroyed.  In the white cells, you may enter or delete data only in the first five columns (columns for the Date, Open, High, Low, and Close).  Any white cells to the right of the first five columns may have hidden formulas.  Entering anything in those columns will probably damage the calculator.  IF you make a mistake, press the "Ctrl" key and the "Z" key to reverse the last action or close the calculator without saving the changes and then re-open it.  The image below shows the goldenrod-colored cells.  The first of these is cell A-3, where the current date must be entered each day. 

          

The above is an image of the top left portion of ATR Stops.  ATR Stops will not function until you do four things. 
1. Enter the current date in the goldenrod colored box of cell A-3.  For example, if today's date is February 4th, just type 2/4 and press the "Enter" key.  The program will complete the entry. 
2. Enter the Four "Operational Codes" provided by StockDisciplines.com.  The codes are entered in Column L rows 3, 5, 6, and 7 (the cells in the image are labeled "Enter Code 1," "Enter Code 2," and so on).  The codes will not function correctly until they are "turned on" in step 3.  These codes access and control various funcions and computational modules within the program.  The program will not operate without them.
3. Enable ATR Stops to import information from StockDisciplines.com.  To do this, click on the "Options" tab to the right of " Security Warning   Data connections have been disabled." and enable all items displayed.  This "warning" may not appear if you clicked on "Enable automatic refresh"  when the gray box appeared earlier that said "This workbook contains queries to external data that refresh automatically."

4. Press the f-9 key.  Instead of numbers in columns G and I, you will see "#VALUE!" until you press the f-9 key. Wait until the "#VALUE!" alerts disappear or convert to numbers.  If the "#VALUE!" alerts do not disappear or convert to numbers, press the "Ctrl" key, the "Alt" key, and the F5 key (all three together).  Then, press the F9 key again.  The program will not function correctly unless you enter the current date and unless you enable the data connection.  The program will want to connect to StockDisciplines.com regularly whenever it is open to make sure it has updated information.



   ATR Stops     

The actual appearance of the program is shown in the above image.  Strictly speaking, licensees use ATR Stops as an exe application rather than as the kind of xls or xlsm spreadsheet (uaually associated with Excel).  If thwe data does not appear in columns "G" or "I," look for the message that says, " Security Warning   Data connections have been disabled" that is followed by a box labeled "Options."  The connections must still be enabled.  The yellow box in rthe above image is used for easy navigation.  The heading for each stock's data also has a link labeled "Top" that will take the person back to the top of the worksheet (the place illustrated above).    

The four "Operational Codes" are interdependent, so you could think of them as a single complex 60-digit code that controls various operations.  Modifying a single digit in any of them can cause subtle changes for certain combinations of settings or shut the program down entirely.  In other words, do not tamper with the codes we provide, because altering them in any way could make the program unreliable.  That is, corruptions can occur in output that are not obvious (stop losses generated could be quite wrong relative to the volatility of the security being tracked).  The codes we provide have dashes to make it easy for the user to keep his place while entering the numbers.  When a person enters his codes, he must not enter the dashes, because they are not part of the codes.  They are inserted by the program after the numbers have been entered.  The dashes appear after entry to make it easier for a person to compare the code entered with the original when checking for accuracy. 


The 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 use ATR Stops to track real positions.  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.  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.  You can get to the lab quickly by clicking on "LAB" in the yellow box at the top.  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.


The above image is based on 4 times the ATR.  The stop is traced in red.  The red line can be moved closer to the price action by entering a smaller multiplier.  It can be moved farther away from the price action by using a larger multiplier.  Multiplier decimals (2.56, 5.43, etc.) can also be used.  In the "LAb," the stop loss follows the stock as it rises and falls.  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.  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 charts in the lab were pre-selected by StockDisciplines.com and cannot be changed.  When you determine the settings for stop losses that work the best for you, those settings can be entered for each of 15 different stocks.  Or, you can enter a different stop loss setting for each stock.  ATR Stops will then automatically compute your stop-losses for you as you enter price data.  

You must have Excel 2007 (or later) installed on your computer, and be able to open an Excel spreadsheet with macros in order to use Stops. To test your system, click on the following link. It will enable you to download a file with a macro (Stops has a few macros).  If you can enter a number and cause the macro to work and the file to recalculate, then you should have no trouble using Stops on your system (unless you have a Linux or Apple system, and those may or may not work depending on configuration).

Ordering and The License Agreement

Read the License Agreement for details before ordering. To read the License Agreement, click on

Agreement.  An order cannot be transmitted to us unless you acknowledge that you have read the License Agreement.

When you place an order, we will send you the address on our Website where you can download ATR Stops (and the password that will enable you to gain access).  When you try to open ATR Stops, you will see a message indicating you need a Registration Key before you can open the program.  Send the automated request to us, and we will send the Registration Key.  You will also be given instructions on how to access the four Operational Codes necessary to make the program work.  When we post the Operational Codes, they are good for about 3 months.  When you get access, those codes may last a day or 3 months, depending on when you order.  If they last only a few days, you may simply return to that page when the codes expire and get the new codes.  The fee is $20/month.  If you cancel your license, your access to new codes will be terminated immediately, and there will be no refund for any unused portion of the month.  However, the codes you have installed will enable you to continue using Stops until they expire.  Therefore, if you get new codes and then cancel, you will be able to use Stops for about 3 months after your cancellation.  If you have cancelled, and you decide you want to use Stops again, you cannot simply reactivate your previous account.  Instead, you will have to place a new order.

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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Links To Popular Articles/Lessons
Topics of Interest
Do You Sell or Hold After Your Stock Has Dropped? Strongest Stocks
he Best Stop Loss for Long-Term Investors  Stock Scanner
The Triple Moving Average Crossover System  ATR Stops
Stock Buy and Sell Signals With The CCI Momentum
Buy and Sell Signals of A Moving Average System  Strongest ETFs
A Test To Find The Best Moving Average Sell Strategy  Stock Market Review
Creating a Trader's Diary  Stop Losses
Use Time-Stops on All Stock Positions  Stock Alerts
The Probability of a Stop Loss Being Triggered  Breakouts
Stock Trader Probabilities  Stock Market Lessons
Moving Average Signals   Products & Prices

 See Stops, our stop loss calculator

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