How to use the ATR indicator to set an ideal stop loss point in a trading?

In the EagleTrader trader interview shared last week, trader Zhang Sen, who has entered the profit-sharing stage, repeatedly emphasized the importance of risk control and regarded it as the core of trading. Therefore, today EagleTrader will explore a practical risk control strategy – ATR stop loss strategy. It can help traders better cope with market volatility, lock in profits, and limit potential losses. It is a common risk management tool. So how can traders flexibly use it in trading?

ATR indicator

ATR, that is, the average true amplitude, is a technical indicator to measure market volatility. It reflects the average volatility of the market by calculating the largest differences between the highest, lowest and closing prices over the past period of time (such as 14 days). The larger the ATR value, the stronger the market volatility; the smaller the ATR value, the weaker the market volatility.

ATR stop loss strategy principle

The basic principle of the ATR stop loss strategy is: determine the stop loss point based on the value of the ATR indicator. The trader first sets an initial stop loss point, and then gradually adjusts the position of the stop loss point according to market fluctuations (i.e., ATR value). When the market moves in a favorable direction, the stop loss point will also move up accordingly to lock in more profits; while when the market reversal, the stop loss point will remain unchanged or slightly adjusted to limit losses.

ATR Stop Loss Strategy Application

Calculate the ATR value:

Traders need to first calculate the ATR value of the market. The calculation formula of ATR is: ATR=[(Previous ATR×(period-1))+Tr of the day]/period. Among them, TR (TrueRange) refers to the maximum difference between the highest price and the lowest price of the day, or the maximum absolute value between the highest price of the day and the closing price of yesterday, or the maximum absolute value between the closing price of yesterday and the lowest price of the day. The cycle is usually set to 14 days, but it can also be adjusted according to actual conditions.

Set the initial stop loss point:

Set a reasonable initial stop loss point based on trading strategies and personal risk preferences. The initial stop loss point can be set to the entry price plus or minus the ATR value of a specific multiple (such as 1.5 times or 2 times). This multiple can be adjusted based on market volatility and individual risk tolerance.

Dynamic adjustment stop loss point:

As the market price changes, traders need to dynamically adjust the position of the stop loss point. For example, whenever the market price rises by a certain amount (such as 1ATR), the stop loss point can be moved up the corresponding distance. Similarly, when the market price falls, the stop loss point needs to be adjusted accordingly. This not only ensures that the stop loss point is always in a reasonable position, but also avoids being disturbed by short-term market noise.

Monitor market changes:

Continuous monitoring of market dynamics is the key to the success of ATR stop loss strategy. Traders need to pay close attention to the impact of market trends, economic data, policy changes and other factors on the ATR value, and adjust trading strategies and stop loss points in a timely manner.

Practical case description

Suppose that a foreign exchange currency pair (such as EUR/USD) is currently priced at 1.2000, and the ATR value in the last 14 trading days is 0.0150 (i.e. 150 basis points). Now, traders decide to enter the market to buy the pair and hope to use the ATR stop loss strategy toManage risk.

If the trader chooses to set the stop loss point to 5 times the ATR value (this is a relatively large multiple, usually used in situations where there is high volatility or the trader is willing to bear greater risks), the stop loss point is calculated as follows:

Stop loss point=entry price-(ATR value × 5)

=1.2000-(0.0150×5)

=1.2000-0.0750

=1.1250

This means that once the exchange rate of EUR/USD falls below 1.1250, traders should decisively stop the loss and exit to avoid further losses.

Precautions for ATR Stop Loss Strategy

Extreme fluctuations: Under extreme market conditions (such as black swan events), the ATR value may increase or decrease sharply, resulting in an unreasonable stop loss point position. Therefore, in this case, traders need to use ATR stop loss strategy with caution and make comprehensive judgments based on other technical indicators and market analysis.

Parameter adjustment: Parameters in the ATR stop loss strategy (such as ATR multiples, cycles, etc.) need to be adjusted according to market conditions and personal risk preferences. However, frequent parameter adjustments may lead to unstable effectiveness of the stop loss strategy. Therefore, traders are advised to remain cautious and rational when adjusting parameters.

Combined with other tools: ATR stop lossAlthough the strategy works, it cannot be used alone. Traders need to make comprehensive judgments based on other technical analysis tools (such as trend lines, support levels and resistance levels, etc.) and market analysis (such as fundamental analysis, technical analysis, etc.) to improve the trading success rate.

ATR stop loss strategy is a good assistant for foreign exchange traders on the road to risk control, but traders still need to continue to learn and practice, accumulate experience, remain cautious and rational, and make comprehensive judgments based on other technical analysis tools and market analysis. Only in this way can we move forward steadily in a complex and changeable market and achieve long-term profit goals.