T Stop indicator
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TradingView.com Day traders can use information on how much an asset typically moves in a certain period for plotting profit targets and determining whether to attempt a trade. Show Assume a stock moves $1 a day, on average. There is no significant news out, but the stock is already up $1.20 on the day. The trading range (high minus low) is $1.35. The price has already moved 35% more than the average, and now you're getting a buy signal from a strategy. The buy signal may be valid but, since the price has already moved significantly more than average, betting that the price will continue to go up and expand the range even further may not be a prudent decision. The trade goes against the odds. Since the price is already up substantially and has moved more than the average, the price is more likely to fall and stay within the price range already established. While buying once the price is near the top of the daily range—and the range is well beyond average—isn't prudent, selling or shorting is probably a good option, assuming that a valid sell signal occurs.
Entries and exits should not be based on the ATR alone. The ATR is a tool that should be used in conjunction with an overarching strategy to help filter trades. For example, in the situation above, you shouldn't sell or short simply because the price has moved up and the daily range is larger than usual. Only if a valid sell signal occurs, based on your particular strategy, would the ATR help confirm the trade. The opposite could also occur if the price drops and is trading near the low of the day and the price range for the day is larger than usual. In this case, if a strategy produces a sell signal, you should ignore it or take it with extreme caution. While the price may continue to fall, it is against the odds. More likely, the price will move up and stay between the daily high and low already established. Look for a sell signal based on your strategy. You should review historical ATR readings as well. Even though the stock may be trading beyond the current ATR, the movement may be quite normal based on the stock's history. The average true range (ATR) was introduced by Welles Wilder in his book, “New Concepts in Technical Trading Systems.” This indicator applies the ATR as a trailing stop and includes a modified version suggested by Sylvain Vervoort in his article “Average True Range Trailing Stops” (Stocks & Commodities V. 27:6 (34-40)).
 Other than the below description, you may also review our Indicator Spotlight newsletter post on ATR Trailing Stop indicator (with video). The ATR Trailing Stop indicator applies the Average True Range (ATR) in order to establish dynamic risk levels. Specifically, the ATR stop indicator is a measure of volatility, disclosing the following as defined by the lookback period:
An average of this value is then calculated, creating the Average True Range. Of course, NinjaTrader has a predefined ATR indicator (ATR (period)). However, by using a specific formula, an ATR value based on a different input than the close. For example an average price calculation, can also be applied. ATR Multiplier:Because the ATR responds to volatility, the indicator will highlight possible trend changes. The indicator may therefore also be used for stop and reverse systems. However, the ATR stop indicator is primarily suitable for defining exits, not entries. When using the ATR average as a measure for stop loss purposes, you’ll want to use a multiplication factor. We’ve set the default value to 3.5 as it allows us to accommodate more volatile instruments. ATR Trailing Stop Calculation:The modified ATR trailing stop introduced by Vervoort, limits extreme price changes of a single bar. Specifically, a maximum of 1.5 the ATR moving average of the high minus low prices, is permitted. Furthermore, the absolute value of the current high minus the previous close, may be distorted by large gaps between the previous high and current low. Vervoort therefore limits the influence of such gaps by taking into account just half the size of the gap. Of course, the absolute value of the current low minus the previous close may also be distorted in large gaps between the previous low and the current high. Therefore, only half of the size of such gaps are taken into account too. As for the price difference between the current high and low value, if the price stays within 1.5 times the ATR moving average, the modified formula will calculate the difference between the high and low. However, if the current value of the high price minus the low move beyond 1.5 of the ATR moving average, the formula will limit the value to 1.5 times the moving average of the current high minus low price. The modified ATR therefore responds to extended periods of high-volatility, whereas high-volatility events, such as news releases, will only affect the stop level to a moderate degree. We could only detect a minor difference between the standard ATR calculation, and the modified ATR version suggested by Vervoort. Our ATR trailing stop indicator has the option to activate the modified ATR calculation. Also, you may adjust the ATR multiplier to your risk preference. ATR Trailing Stop Trend Reading:The ATR stop indicator applies a trend logic, paint-pars show blue colors for an uptrends, red for downtrends. If you sett the indicator to reverse intrabar, the indicator will factor high and low levels that occur intrabar. The alternative is to wait and see whether the close of the bar breaks above or below the stop line. Other Library IndicatorsOther than the ATR Trailing Stop the following indicators are available from the trailing stop loss category: Chande Kroll Stop, Chandelier Stop, Deviation Stop, HiLo Activator, SuperTrend M11, SuperTrend U11 and the Wilders Volatility Stop. Previous Indicator Spotlights have also reviewed the ATR Trailing Stop, the Chande Kroll Stop and the Wilders Volatility Stop. The features of the Chande Kroll Stop vs. Chandelier Stop were discussed in our Indicator Spotlight newsletter. Other Library IndicatorsThe above indicator are available for NinjaTrader 8. << Categories
Trading can be thought of as a game of probability. This means every trader will invariably be wrong sometimes. When a trade does go wrong, there are only two options: to accept the loss and liquidate your position, or to double down and potentially go down with the ship. This is why using stop orders is so important. Many traders take profits quickly, but hold on to losing trades; it's simply human nature. We take profits because it feels good and we try to hide from the discomfort of defeat. A properly placed stop order takes care of this problem by acting as insurance against losing too much. In order to work properly, a stop must answer one question: At what price is your opinion wrong? In this article, we'll explore several approaches to determining stop placement in forex trading that will help you swallow your pride and keep your portfolio afloat.
One of the simplest stops is the hard stop, in which you simply place a stop a certain number of pips from your entry price. However, in many cases, having a hard stop in a dynamic market doesn't make much sense. Why would you place the same 20-pip stop in both a quiet market and a volatile one? Similarly, why would you risk the same 80 pips in both calm and volatile market conditions? To illustrate this point, let's compare placing a stop to buying insurance. The insurance you pay is a result of the risk you incur, whether it pertains to a car, home, life, etc. As a result, an overweight 60-year-old smoker with high cholesterol pays more for life insurance than a 30-year-old non-smoker with normal cholesterol levels because his risks (age, weight, smoking, cholesterol) make death a more likely possibility. The ATR % stop method can be used by any type of trader because the width of the stop is determined by the percentage of the average true range (ATR). ATR is a measure of volatility over a specified period of time. The most common length is 14, which is also a common length for oscillators, such as the relative strength index (RSI) and stochastics. A higher ATR indicates a more volatile market, while a lower ATR indicates a less volatile market. By using a certain percentage of ATR, you ensure your stop is dynamic and changes appropriately with market conditions. For example, for the first four months of 2006, the GBP/USD average daily range was around 110 pips to 140 pips (Figure 1). A day trader may want to use a 10% ATR stop, meaning that the stop is placed 10% x ATR pips from the entry price. In this instance, the stop would be anywhere from 11 pips to 14 pips from your entry price. A swing trader might use 50% or 100% of ATR as a stop. In May and June of 2006, daily ATR was anywhere from 150 pips to 180 pips. As such, the day trader with the 10% stop would have stops from entry of 15 pips to 18 pips, while the swing trader with 50% stops would have stops of 75 pips to 90 pips from entry. Image by Sabrina Jiang © Investopedia 2021 It only makes sense that a trader account for the volatility with wider stops. How many times have you been stopped out in a volatile market, only to see the market reverse? Getting stopped out is part of trading. It will happen, but there is nothing worse than getting stopped out by random noise, only to see the market move in the direction that you had originally predicted. The multiple day high/low method is best suited for swing traders and position traders. It is simple and enforces patience but can also present the trader with too much risk. For a long position, a stop would be placed at a pre-determined day's low. A popular parameter is two days. In this instance, a stop would be placed at the two-day low (or just below it). If we assume that a trader was long during the uptrend shown in Figure 2, the individual would likely exit the position at the circled candle because this was the first bar to break below its two-day low. As this example suggests, this method works well for trend traders as a trailing stop. Image by Sabrina Jiang © Investopedia 2021 This method may cause a trader to incur too much risk when they make a trade after a day that exhibits a large range. This outcome is shown in Figure 3 below. Image by Sabrina Jiang © Investopedia 2021 A trader who enters a position near the top of the large candle may have chosen a bad entry but, more importantly, that trader may not want to use the two-day low as a stop-loss strategy because (as seen in Figure 3) the risk can be significant. The best risk management is a good entry. In any case, it is best to avoid the multiple day high/low stop when entering a position just after a day with a large range. Longer term traders may want to use weeks or even months as their parameters for stop placement. A two-month low stop is an enormous stop, but it makes sense for the position trader who makes just a few trades per year.
If volatility (risk) is low, you do not need to pay as much for insurance. The same is true for stops—the amount of insurance you will need from your stop will vary with the overall risk in the market. Another useful method is setting stops on closes above or below specific price levels. There is no actual stop placed in the trading software; the trade is manually closed out after it closes above/below the specific level. The price levels used for the stop are often round numbers that end in 00 or 50. As in the multiple day high/low method, this technique requires patience because the trade can only be closed at the end of the day. When you set your stops on closes above or below certain price levels, there is no chance of being whipsawed out of the market by stop hunters. The drawback here is that you can't quantify the exact risk and there is the chance the market will break out below/above your price level, leaving you with a big loss. To combat the chances of this happening, you probably do not want to use this kind of stop ahead of a big news announcement. You should also avoid this method when trading very volatile pairs such as GBP/JPY. For example, on Dec. 14, 2005, GBP/JPY opened at 212.36 and then fell all the way to 206.91 before closing at 208.10 (Figure 4). A trader with a stop on a close below 210.00 could have lost a good deal of money. Image by Sabrina Jiang © Investopedia 2021 The indicator stop is a logical trailing stop method and can be used on any time frame. The idea is to make the market show you a sign of weakness (or strength, if short) before you get out. The main benefit of this stop is patience. You will not get shaken out of a trade because you have a trigger that takes you out of the market. Much like the other techniques described above, the drawback is greater risk. There is always a chance the market will plummet during the period that it is crossing below your stop trigger. Over the long term, however, this method of exit makes more sense than trying to pick a top to exit your long or a bottom to exit your short. How many times have you exited a trade because RSI crossed below 70, only to see the uptrend continue while RSI oscillated around 70? In Figure 5, we used the RSI to illustrate this method on a GBP/USD hourly chart, but many other indicators can be used. The best indicators to use for a stop trigger are indexed indicators such as RSI, stochastics, rate of change, or the commodity channel index. Image by Sabrina Jiang © Investopedia 2021 With trading, you're always playing a game of probability, which means every trader will be wrong sometimes. It's important for all traders to understand their own trading style, limitations, biases, and tendencies, so they can use stops effectively. |
