ATR Stops

brucefleet

I use ATR settings of 2xATR(8) & 5%. I am a swing trader so my trades tend to last from days to weeks. Any opinion as to the best ATR settings to use?
Thanks in advance!
Bruce

markd

Hi @brucefleet , I'm not sure there is a "best" setting. ATR does have the advantage of fluctuating with volatility, so I'm guessing it's fairly adaptable to different kinds of stocks. Finding the "best" theoretical setting would require some programming to analyze lots and lots of data. Even then, markets change, so it might not work so well going forward. Your setting is pretty wide, so I'm assuming you use it as a disaster stop rather than a profit taking stop.

But, if you are a swing trader, and you are trading with the trend on technicals and not fundamentals, there is no reason to hold through a large counter trend move, even if the longer trend is not over (and presumably, nobody can be sure of that). In an up trend, once sellers show strength and buyers are slow to respond, it's OK to get out on that weak buyer response instead of waiting for price to drop again. Getting out when danger appears (but not before) locks in your profit and gives you flexibility and peace of mind. If the trend is actually over, you are safe. If it's not, as a swing trader, you can always get back onto the trend again when real buying strength re-appears.

brucefleet

Which part of the setting to you believe is wide? 2x ATR or the 5%? All of my purchases are based strictly on TA. I am very happy with my buy side system I do believe though that real money is made (and risk management) on exits. I like ATR because of the flexibility based on volatility. BTW...thanks for your feedback. I find this one of the most difficult subjects.

markd

My mistake. I thought you meant 2xATR plus 5% (which I took to mean 5 per cent of the 2xATR). Do you hang those ATRs from the highest low or high, or from a moving average?

brucefleet

Highest high. Do you have an opinion of ATR vs Chandelier stops, which I believe are essentially the same thing, but I may be mistaken. Thanks!

markd

Chandelier stops use the same method you describe, but the defaults are wider - 22 bars for ATR instead of 8, 3 for the multiplier instead of 2. I think the best choice is largely a matter of temperament.

A wider stop keeps you in longer, which is fine in a long down trend, but you have to sit out bigger moves against you, which is hard, and you give up more time and points when the stop does get hit.

A narrower stop puts cash in your pocket sooner and, as I said, gives you flexibility to get back in or change to another stock. (I suppose that's an illusion of control, but what is life without our illusions?)

If a long term trend is in fact in place, and you somehow know that, the wider stop will most likely net you a larger profit. But, I think it's too often too hard to tell whether the trend will resume, I don't like giving up a lot of points, or letting weeks go by with nothing to show for it, and so to me it makes more sense to be out sooner and let things develop. But as I said, that's a matter of temperament.

Here's a link to the chart school article on chandelier exits that you might like, if you haven't seen it already:

stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chandelier_exit

brucefleet

Thank you Mark! It was great chatting with you about this. I appreciate it!

sorenfl

Do you have some litterature regarding ATR stop limits/stop losses?
People talk often about pips, but not so much in to trading lingo. I am an oldschool TA long swing investor you see.