One of my favorite indicators is the ATR trailing stop. The original ATR trailing stop was developed by J. Wells Wilder in his 1978 book, New Concepts in Technical Trading Systems. Wilder experimented with trend-following Volatility Stops using average true range. The system was subsequently modified to what is commonly known as ATR Trailing Stops.
I have done a number of classes combining my favorite indicators, such as the MACD and moving average crossovers. I have found that ATR trailing stops, when configured correctly, have fewer “fakeouts” than the moving average crossovers I usually use.
The ATR trailing stops I use take a 9 period average true range, and then add a 2.9 multiplier to configure the stop. I have experimented with many different configurations, and these values have worked well consistently. TOS gives you the option of an “average type”. I have found that using exponential, not Wilder’s actually works better. Here are my settings…
As you can see, the buy and sell colors have to be reversed to work correctly.
I use ATR trailing stops on all time periods. Usually I scan for daily triggers, but use shorter time periods such as the 78,15, 5, or 2 to time my entries. Here is an example of finding a potential trade on a daily, but using an ultra short term chart to time your entry.
Note these 2 charts on JACK today. The stock plummeted on a disappointing earnings report, breaking a great ledge around 70.25. The stock has been rallying for a few days, trying to work off its oversold condition. If “eyeing” a short, you have to put yourself in an offensive, not defensive, position. If you shorted at the orange arrow, then you are trying to anticipate the move and put yourself in a real defensive position. On the other hand, if you short at the ATR trailing stop, as shown by the red arrow, you are now in an offensive posture. You would have made at least 70 cents in 5 minutes!