Trading With Atr Part 2: by Daryl Guppy

TRADING WITH ATR part 2
By Daryl Guppy
Volatility is the new challenge in modern markets. It has made identifying the end of
downtrends and the start or new uptrends more difficult. We have made increased uses of the
trader’s application of the Average True Range (ATR). The ATR calculation contains a number
of variables and in these notes we show how they are selected and combined to give optimal
outcomes for individual stocks.
The ATR tool in the GTE charting package is exceptionally useful because it allows the
trader to start the ATR calculation from a user selected point selected with the click of a mouse.
This is not easily possible with MetaStock where the user must use separate dialog boxes to
input the starting point.
Changes in ATR sensitivity have a large impact on the positioning of trading signals.
The changes in sensitivity can be seen on the chart. The 1*ATR delivers a trend change
signal more quickly than the 2*ATR calculation. In volatile conditions we prefer to use the more
sensitive calculation so we can get an early signal. The key to deciding which to use is the
compatibility. In this chart extract neither the 2*ATR nor the 1*ATR generate false exit signals in
this falling trend. In this case, we would use the 1*ATR calculation.
The same shift applies if we change the sensitivity of the long side ATR. We use the
more sensitive short side 1*ATR as the reference point.
The objective is to adjust the sensitivity of the ATR calculation by adjusting the
application of the ATR calculation from 1*ATR to 2*ATR. The sensitivity adjustment is designed
to be compatible with the observed trend. In falling markets with high volatility we use a short
side 2*ATR calculation to ensure the trend breakout is genuine. We then use a 1*ATR to ride
the rising trend to keep the stop loss tight to protect profits.
The combination you use is a judgement call. This is the methods we use. In a volatile
falling market if the 1*ATR short sides calculation is compatible with the falling trend because it
does not give false exit signals, then we apply the 1*ATR short side. This gives an earlier entry
signal into the trend reversals. We use 1*ATR to trade the rising trend to keep the stops tight.
We use a 14 day calculation period for the ATR. The chart shows the impact of changing
the calculation length. We used the 14 day 1*ATR as the base calculation point.
We use a 3, 7, 14 and 21 moving average of the 1*ATR short side. There is no strongly
significant difference in the entry points for these values. We find the default 14 day calculation
gives robust results that work in most situations.
The final variable is the trigger point in the ATR calculation. The trigger point is the point
where the ATR calculation ends. This is shown by a horizontal line that moves to the right of the
chart. In GTE this line colour changes to black. For the short side ATR we use a trigger point
abased on the low. The low must be higher than the value of the short side ATR before the ATR
indicator signals a change in trend. For the long side ATR we prefer to use the closing price as
the trigger.
The chart shows the difference. The calculation for the ATR does not change, The green
ATR line exactly matched the red ATR line calculation. The difference is when the ATR
calculation stops. If the trigger is based on the low then an exit is triggered near $5.12. It is a
false exit. If the close is used as the trigger then the exit is triggered near $5.84.
We find the application of traders ATR to be very successful in current market
conditions. These notes explain in detail how we assess and apply this indicator.
INDICATOR REVISION
TRADERS ATR
The traders application of the Average True Range (ATR) captures price volatility, defines the
emerging trend breakout and provides a method to manage the developing trade. Our purpose
is to use the ATR calculation as a stop loss designed to protect capital and identify the end of
one trend and the beginning of another. We use the ATR as a method to identify and confirm
trend changes. Later we want to use the ATR as a protect profit stop designed to protect profits
and identify the end of a trend. Traders ATR is a tool in Guppy Traders Essentials charting.

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