> For the complete documentation index, see [llms.txt](https://chartschool.stockcharts.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/atr-trailing-stops.md).
# ATR Trailing Stops
## What Are ATR Trailing Stops?
The ATR (Average True Range) Trailing Stop is a volatility-based overlay that sets dynamic stop-loss levels for market exits or entries. The trailing stop is plotted below prices in an uptrend, and above prices in a downtrend.
This overlay uses the Average True Range, a metric that evaluates market volatility, to determine where the trailing stops will be placed. By doing so, the overlay can help you manage risk (or identify market entry points) by dynamically adjusting the stop levels to the changing market conditions.
{% hint style="info" %}
**Learn More:** [Average True Range (ATR)](/table-of-contents/technical-indicators-and-overlays/technical-indicators/average-true-range-atr.md)
{% endhint %}
## Calculating ATR Trailing Stops
Whether the security is in an uptrend or a downtrend, the initial step is to calculate the ATR (Average True Range). By default, the ATR Trailing Stops are calculated using a 21-period ATR.
Chartists must also choose a multiplier, which adjusts how far the trailing stop should be from price. The choice of multiplier (such as 2x, 3x, or higher) depends on the anticipated level of volatility and the aggressiveness of your risk management approach. By default, the multiplier is set to 3.
The formula for ATR Trailing Stops depends on the trend direction.
### Formula in an Uptrend
```
ATR Trailing Stop = Highest Price - (ATR x Multiplier)
```
In an uptrend, with the ATR Trailing Stop below the price bar, subtract the product of the ATR and the chosen multiplier from the highest price. This gives you the stop-loss level if you're holding a long position.
By default, the highest price refers to the highest closing value, but if the **Use High/Low** checkbox is checked, it will use the highest high in the formula instead.
#### Adjusting the Stop in an Uptrend
The trailing stop is adjusted only in the direction of the trend. For a long position, the stop level is raised if the price makes new highs, but the stop will never be lowered while the ATR Trailing Stop is below price.
When a price bar closes below the stop, this signals a change in trend. The next price bar will have its ATR Trailing Stop set above the price bar.
{% hint style="warning" %}
**Note:** Even if the **Use High/Low** checkbox is checked, the signal is only triggered if the *closing* price is below the stop.
{% endhint %}
### Formula in a Downtrend
```
ATR Trailing Stop = Lowest Price + (ATR x Multiplier)
```
In a downtrend, with the ATR Trailing Stop above the price bar, add the product of the ATR and the chosen multiplier to the lowest price. This provides the stop-loss level for a short position.
By default, the lowest price refers to the lowest closing value, but if the Use High/Low checkbox is checked, it will use the lowest low instead.
#### Adjusting the Stop in a Downtrend
The trailing stop is adjusted only in the direction of the trend. For a short position, the stop level is lowered if the price makes new lows, but the stop will never be raised while the ATR Trailing Stop is above price.
When a price bar closes above the stop, this signals a change in trend. The next price bar will have its ATR Trailing Stop set below the price bar.
{% hint style="warning" %}
**Note:** Even if the **Use High/Low** checkbox is checked, the signal is only triggered if the *closing* price is above the stop.
{% endhint %}
## Interpreting ATR Trailing Stops
### Identifying Trends and Trend Changes
You can use the ATR Trailing Stops as a tool for trend identification. If the ATR Trailing Stop is below the price, the market is in an uptrend. Conversely, if the trailing stop is above the price, it suggests that the market is in a downtrend.
ATR Trailing Stops are above price in a downtrend and below price in an uptrend.
In the example above, Amgen (AMGN) is in a downtrend from mid-March to May. The ATR Trailing Stops are above the price bars, and move downward as prices drop. In May, prices start to rise, but since stops above price are never lowered, they stay at the same level. In early June, price closes above the trailing stop, signaling a change in trend. The next bar's stop is set below the bar, and the stops are raised as prices rise. In July, prices dip lower, but trailing stops below price are never lowered, so they stay at the same level until prices begin to rise again later in July.
### Setting Exit Points
The most common use of the ATR Trailing Stops is to set stop losses (exit points). For a long position, you would exit when the price drops below the stop. For a short position, the exit signal is when the price rises above the stop. This can help protect your profits by allowing positions to run during favorable conditions and closing them when markets reverse.
Exit long positions when price closes below the ATR Trailing Stop.
In the example above, chartists who sold their Home Depot (HD) shares when price closed below the ATR Trailing Stop in late August would have avoided the steep price drop over the month of September.
### Finding Entry Points
While primarily used for exit signals, ATR Trailing Stops can also be used as entry signals in a trend-following strategy. For instance, you can enter a long position when the price moves above the ATR Trailing Stop and enter a short position when the price moves below the ATR Trailing Stop.
Enter long positions when price closes above the ATR Trailing Stop.
In the example above, chartists could buy AT\&T (T) shares when price closed above the ATR Trailing Stop in mid-July. Using this approach, you would not enter at the absolute bottom in early July, but there would still be plenty of trend to profit from. Price remained in an uptrend and did not fall below the stop again until late September.
## The Bottom Line
ATR Trailing Stops can be used to set stop losses and define entry points. Since they are adjusted automatically as prices change, they can help manage risk and protect profits. As with all technical indicators, ATR Trailing Stops should be used in conjunction with other technical analysis techniques.
## Charting ATR Trailing Stops
### Using with StockChartsACP
This overlay can be added from the Chart Settings panel for your StockChartsACP chart. ATR Trailing Stops can be overlaid on the security's price plot or an indicator panel.
[Click here for a live version of this chart.](https://schrts.co/uZffkNHV)
By default, the overlay uses 21 periods for the ATR calculation and 3 for the Multiplier. If you want the highest high and lowest low to be used in the calculation, rather than using the highest close and lowest close, then check the Use High/Low checkbox. Each of these parameters can be adjusted to meet your technical analysis needs.
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