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ATR (Average True Range) Stop Loss Calculator

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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.

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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.
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Table of General Terms

To facilitate understanding, here’s a table defining key terms related to ATR and stop loss calculations:

TermDefinitionExample Values
ATRAverage True Range, a measure of market volatilityCalculated in price units
True RangeThe greatest of the daily high-low, high-close, and low-close rangesCalculated daily
Entry PriceThe price at which a trade is initiated$50, $100
MultiplierA factor that determines the buffer added to the entry price1.5, 2, 3
Stop LossThe set price at which a losing trade will be closed to manage riskDetermined 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:

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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

Q1: Why use ATR for setting stop losses?

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.

Q2: Can the ATR Stop Loss Calculator be use for any trading instrument?

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.

Q3: How does changing the multiplier affect the stop loss order?

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.

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