The ATR Stop Loss Calculator is an essential tool that helps traders set stop-loss orders based on market volatility. The calculator uses the Average True Range, a measure of market volatility, to determine the most appropriate point at which to set a stop loss. This approach helps to protect investments by ensuring that stop loss orders are set in a way that accounts for current market conditions, preventing premature exit from positions while also safeguarding against significant losses.
Formula
The ATR Stop Loss Calculator employs a straightforward yet powerful formula to establish stop loss points:
Calculate the ATR:
ATR = (Previous ATR * (n – 1) + True Range) / n
Where:
- True Range = Max[(High – Low), Abs(High – Previous Close), Abs(Low – Previous Close)]
- n is the number of periods, typically 14 days, used to calculate the ATR.
Determine the ATR Stop Loss:
ATR Stop Loss = Entry Price – (Multiplier * ATR)
Where:
- Entry Price is the price at which the trade is entered.
- Multiplier is a factor that adjusts the distance of the stop loss from the entry price, common values being 1.5, 2, or 3, depending on the trader’s risk tolerance and market conditions.
Table of General Terms
To facilitate understanding, here’s a table defining key terms related to ATR and stop loss calculations:
| Term | Definition | Example Values |
|---|---|---|
| ATR | Average True Range, a measure of market volatility | Calculated in price units |
| True Range | The greatest of the daily high-low, high-close, and low-close ranges | Calculated daily |
| Entry Price | The price at which a trade is initiated | $50, $100 |
| Multiplier | A factor that determines the buffer added to the entry price | 1.5, 2, 3 |
| Stop Loss | The set price at which a losing trade will be closed to manage risk | Determined by the calculation |
Example
Consider a trader who enters a position in a stock at $100 and uses the ATR Stop Loss Calculator to manage risk. Assume the current ATR is $5, and the trader chooses a multiplier of 2:
ATR Stop Loss = $100 – (2 * $5) = $100 – $10 = $90
In this example, the trader would set a stop loss order at $90. If the stock price drops to $90, the position would automatically be closed, thus limiting the trader’s loss.
Most Common FAQs
A1: ATR provides a dynamic measure of market volatility, allowing traders to set stop losses that adjust to changing market conditions, offering a more effective risk management strategy.
A2: Yes, the ATR Stop Loss Calculator is versatile and can be use across different trading instruments, including stocks, forex, and commodities, as long as volatility data is available.
A3: Increasing the multiplier increases the distance of the stop loss from the entry price, offering greater leeway during market fluctuations but potentially increasing the loss if the stop is trigger.