Stocks & Commodities V. 27:6 (34-40): Average True Range Trailing Stops by Sylvain Vervoort

Average True Range Trailing Stops by Sylvain Vervoort

In this second of a three-part series we will compare trailing-stop methods using an average true range (Atr) trailing stop.

by Sylvain Vervoort

The average true range (Atr) was developed by J. Welles Wilder and introduced in his book New Concepts In Technical Trading Systems. The Atr indicator measures a security’s volatility. Wilder defined the true range concept as the greatest value of the:

• Current high less the current low

• Absolute value of the current high less the previous close

• Absolute value of the current low less the previous close

Wilder then calculated an average of this value for creating the average true range.

Like most technical analysis programs, MetaStock has a predefined Atr indicator (Atr (period)). But if you need to calculate it yourself, it can be created as follows:

{Get the required ATR period;} period:=Input(“ATR Period :”,1,100,5); {Calculate the biggest difference based on the true range concept;} diff1:=Max(H-L,Abs(H-Ref(C,-1))); diff2:=Max(diff1,Abs(L-Ref(C,-1))); {Use Wilders’ moving average method to calculate the Average True Range;} Mov(diff2,period*2-1,E)

With this formula you could create an Atr value based on something other than the close, such as an average price.