To form a profitable trading strategy, it is important to know when to enter and exit the trade. While most traders use several tools to enter a trade, they often fail to comprehend when to exit. A perfect exit point helps traders do their job without added mental pressure as it relieves them from added mental pressure. While many tools and indicators can help you find the exit spot, the Average True Range Trailing Stops, or the ATR Trailing Stops, is deemed one of the best. Traders majorly use it to protect their capital. You can use it for individual trades where it can be used to lock in individual profits. When used alongside a trend filter, it can also be used to find entries.

What is ATR trailing stop?

ATR Trailing Stops or Average True Range Trailing Stop represents the process of setting trailing stops to close positions based on the average true range. Stop loss is determined based on a measure of the degree of price volatility (Average True Range)  in order to protect capital and lock in profits on individual trades.

How to Time Exits Using the ATR Trailing Stops

The concept of Average True Range was first introduced in 1978 by J. Welles Wilder. Stock or index volatility is measured using the ATR, and the detailed explanation could be found at the Average True Range. In the initial stages, Volatility Stops that follow trends were used with the Average True Range by Wilder. This experiment later helped in the development of Average True Range Trailing Stops.

ATR Trailing Stop Loss Strategy

You can use the ATR Trailing Stop to identify exit signals for both short and long positions:

• For a long position, the exit position will be a sell position. It would help if you exited when prices cross below the trailing line created by the ATR.
• For a short position, the exit position will be a buy position. It would help if you exited when prices move above the trailing line created by the ATR.

Example

The given graph shows the downtrend, which is highlighted with the ATR’s help. It also has the 63-day exponential MA that has been used here as the trend filter.

According to this graph:

• When the price gets closed below the ATR, but the exponential average remains close, you must go short.
• As soon as the price cross above the ATR trend line, you must exit.

Setting Up ATR Trailing Stops

The ATR time period can be set from 5 to 21 days. While the developer suggests setting it for 7 days for general trading, 21-days for long-term trading, and 5-days for short-term trading. For trailing stops, multiples ranging from 2.5 to 3.5 times the ATR. The lower multiples can get more susceptible to whipsaws. 

The default setting is 3X21 day ATR. The Closing Price is also set as default.

The ATR Formula

1. Calculate the ATR trailing stop using the following method:
2. Average True Range (ATR), a volatility indicator that compares each day’s range to measure commitment, is calculated.
3. The result is multiplied by the chosen multiple, 3XATR, in this example.
4. If there is an uptrend, the result from step 2 is subtracted from the Closing Price. This will be your stop for the next day.
5. The result from step 2 is added to the closing price if the prices close below the ATR stop. This is done to track short trade.
6. If the prices do not close below the ATR, keep subtracting 3XATR from every following day. This will continue till the price reverse below the ATR stop.

The Evolution of  the ATR Trailing Stops

The ATR stops are susceptible to whipsaws unless the trend is strong. This makes them more volatile than the rest. To avoid this volatility, you must use it with a trend filter. These stops are highly adaptive to changing market conditions than their counterparts, like the Percentage Trailing Stop. However, it yields similar results if you are applying it to stocks. Keep in mind that these need to be filtered for strong trends. 

There are two possible weaknesses of Volatility Stops and the original ATR. These are:

• In an uptrend, the stop moves downwards when the ATR widens. A ratchet mechanism can be deployed to deal with this weakness.
• The Reverse-and-Stop mechanism conjectures that you will be switching to a short position as soon as you stop out of a long position. The opposite is true, as well. When you are in a system that follows trends, it is widespread to exit early and get the next entry in the previous trade’s direction. You can deal with this problem by using ATR Bands.

ATR trailing stop EA

Please download ATR trailing stop EA.

This EA, please do not use for trading because trading rules are not defined. However, using this code, you can add entry rules and use ATR trailing stop for trading.

The main idea of ATR trailing EA is this code:

                    

//–

void SendOrder(double _stop,double _take)//Order send module buy/sell

{

//—

atr = iATR(Symbol(), atrTf, atrPer, 0);

atrSL =(atr * _stop / _point);

atrTP =(atr * _take / _point);

//—

switch(Ordertype)

{

case _buy: //Buy order

_mode =OP_BUY;

pricemode = Ask;

col = Green;

_type=”BUY”;

_SL = Ask – atrSL * _point;

_TP = Ask + atrTP * _point;

break;

case _sell://Sell order

_mode = OP_SELL;

pricemode = Bid;

col = Red;

_type=”SELL”;

_SL = Bid + atrSL * _point;

_TP = Bid – atrTP * _point;

break;

}

if(CheckMoneyForTrade(Symbol(),_mode,LotSize()))

Ticket=OrderSend(Symbol(),_mode,LotSize(),pricemode,5,0,0,WindowExpertName(),MagicNumber,0,col);

if(Ticket<1)

{

Print(“Order send failed, OrderType : “,(string)_type,”, errcode : “,GetLastError());

return;

}

else

Print(“OrderType : “,(string)_type,”, executed successfully!”);

if(OrderSelect(Ticket, SELECT_BY_TICKET, MODE_TRADES))

{

if(!OrderModify(OrderTicket(), OrderOpenPrice(), _SL, _TP, 0))

{

Print(“Failed setting TP/SL OrderType : “,(string)_type,”, errcode : “,GetLastError());

return;

}

else

Print(“Successfully setting TP/SL on OrderType : “,(string)_type);

}

}

//–

int Position()//This function prevents this adviser from interfere with other experts you may use on same account

{ // It checks and handle it’s own orders.

int dir=0;

for(int i = OrdersTotal() – 1; i >= 0; i–)

{

if(!OrderSelect(i, SELECT_BY_POS))

break;

if(OrderSymbol()!=Symbol()&&OrderMagicNumber()!= MagicNumber)

continue;

if(OrderCloseTime() == 0 && OrderSymbol()==Symbol() && OrderMagicNumber()==MagicNumber)

{

if(OrderType() == OP_SELL)

dir = -1; //Short positon

if(OrderType() == OP_BUY)

dir = 1; //Long positon

}

}

return(dir);

}

//–

                

Conclusion

It is important to use the right tools to spot exit signals. You will be in a better position by using the Average True Range Trailing Stops combined with a trend filter.

The trading market never operates without the involvement of a certain degree of risk. Prices of securities and instruments move constantly. Some securities are riskier than the others as they are more volatile. Volatility is used to define constant price movement where the prices can go up and down and come back again. Cryptocurrency is considered one of the most volatile investments. Volatility scares new traders away, but veterans know how to use it for their benefit. With the help of a good volatility indicator, they can strategize more accurately and make a profit. One such indicator is the Choppiness Index. 

Choppiness Index represents an indicator that determines how much market trading sideways or trading within a trend. It is developed by an Australian commodity trader Bill Dreiss. Choppiness Index uses a scale from 1 – 100 where the market is considered choppy as values near 100, over 61.80, and trending when values are lower than 38.20.

Developed by an Australian commodity trader, Bill Dreiss, the Choppiness Index is touted as one of the best volatility indicators. It was designed to highlight the trends of the market solely. It was not to be used to predict any price direction. It was named si because its developer wanted this indicator to determine the choppy (ranging) or not choppy (trending). 

Traders can know about the strength of a trend by reading the choppy scale between 0 and 100. The higher values stand for consolidation, while the lower values depict strong trends (directional trending).

Please download the Choppiness Index indicator.

Finding Trading Signals Using the Choppiness Index

It is effortless to set the Choppiness Index and use it to find trading signals. Though it’s default setting is of 14 days, you can easily customize it. Fibonacci values are usually used as extremes when the market is trendy or choppy. 

Once you have customized the days, you need to look at the scale to identify the signals. These signals will be between zero to a hundred. The scale is divided into three parts:

• The Higher Threshold: If the scale’s value is above 61.8, it is considered the higher threshold. It indicates consolidation in the market.
• The Lower Threshold: If the value on the scale is less than 38.2, it is considered the lower threshold. It shows strong signals. This means that the market has strong trends.
• The Midline: This index is used to measure current trend status. If the value on the scale is above 50, you can expect trends to remain choppy. On the contrary, if the value is below 50, the market trends tend to persist. This proves that the Choppiness Index lags in conveying the information about the actual trend.

How to Create Trading Strategies Using the Choppiness Index?

Note that a solitary indicator, tool, or oscillator cannot assist you in creating a strong trading strategy. You have to use every supporting tool in combinations. Here, we are using the Choppiness Index with the ADX (Average Directional Index) and the RSI (Relative Strength Index) to generate trading signals. We can expect these three to give us comprehensive buy and sell signals.

Buy signals are generated when the following takes place:

• The Relative Strength Index is more than 60.
• The Choppiness Index closes below 38.2 (lower threshold).
• The Average Directional Index cuts 20 levels from beneath. 

You can see all of the above happenings in the graph given below. There is a strong upside rally because all of the above points are taking place simultaneously.

Sell signals are generated when the following takes place.

• The Relative Strength Index is more than 40.
• The Choppiness Index closes once more below 38.2 (lower threshold).
• The Average Directional Index against cuts 20 levels from beneath. 

The only change taking place here is caused by RSI. Look at the following graph to see a strong all of the stocks of Religare Enterprises.

Conclusion

The Choppiness Index makes it easier for traders and investors to ranges and market trends. It is definitely an interesting tool to have on your trading platform. While it is great at measuring the current trends, the same cannot be said when it comes to actual trends. 

We will not advise you to use this or any other tool in isolation. When combined with other tools, it helps you in identifying different types of signals. If you are new to using the Choppiness Index, start with paper or small investment.