Abbreviation: TrailPriceATR
Category: Trading Strategy: Protective Stops
Input Parameters:

 
Calculation:

For a long position,
Trailing Price: Points = Best Price – AverageTrueRange

Best Price = maximum High Price since the position was entered 

For a short position,
Trailing Price: Points = Best Price + AverageTrueRange

Best Price = minimum Low Price since the position was entered 

Note: Since Average True Range can vary up or down on every bar, the old trailing price value is used anytime the latest trailing price calculation would result in a lower trailing price than the old value for long positions or a higher trailing price than the old value for a short position.

 
Discussion:

This indicator is useful for creating a trading strategy trailing stop that trails price movement by a multiple of the recent price volatitily as measured by Average True Range.

Example:

If your entry price is 100 and your initial average true range is 4 then:

for a long position, a stop is placed at 96 initially and it will change if the issue increases in value or the average true range changes. If the stock climbs to 110 and the average true range is 6 at the same time, then the trailing stop will be calculated to be 104 (6 points below 110). Once the stop is placed at 104 it will never go down. However, if the best price remains at 110, but the average true range decreases to 3, then the trailing price would be changed to 107 (3 points below 110). Since the trailing price will never go down, if the best price remains at 110 and the average true range goes back up to 5, the old trailing price of 107 will remain in place until a new trailing price above 107 is calculated due to either an increase in the best price or a smaller average true range value. The stop order will be activated once the price drops down to the value of the trailing stop, at which point you will exit your long position.

for a short position, a stop is placed at 104 initially and it will change if the issue decreases in value or the average true range changes. If the stock falls to 90 and the average true range is 6 at the same time, then the trailing stop will be calculated to be 96 (6 points above 100). Once the stop is placed at 96 it will never go up. However, if the best price remains at 100, but the average true range decreases to 3, then the trailing price would be changed to 93 (3 points above 100). Since the trailing price will never go up, if the best price remains at 100 and the average true range goes back up to 5, the old trailing price of 93 will remain in place until a new trailing price below 93 is calculated due to either an decrease in the best price or a smaller average true range value. The stop order will be activated once the price rises to the value of the trailing stop, at which point you will exit your short position.