ATR (Average True Range) Stop Loss Calculator

Updated on

What is ATR (Average True Range) Stop Loss and Why Should You Care?

Ever wondered how traders decide when to cut their losses and walk away? Meet ATR (Average True Range) Stop Loss—a technical indicator that helps traders set stop-loss levels for financial instruments. Let's break it down in simple terms: this tool measures market volatility. By using ATR, traders can establish a level at which they will exit a trade to avoid further losses once the price has fallen by a specified amount.

Why should you care? Setting a strategic stop-loss can save your portfolio from significant downturns. Think of it as a safety net that catches you before you fall too far.

How to Calculate ATR (Average True Range) Stop Loss

Ready to dive into the math? Calculating ATR Stop Loss might seem complicated, but it's quite straightforward if you follow these steps.

Here's the formula you'll be using:

\[ \text{ATR Stop Loss} = \text{Currency Exchange Rate} * (1 – \text{Average 1 Month ATR}) \]

Where:

  • Currency Exchange Rate: Current exchange rate of the currency pair you're trading.
  • Average 1 Month ATR: The average true range over a month, expressed in decimal form.

To calculate the ATR stop loss, subtract the average 1 month ATR from 1, and then multiply the result by the current exchange rate.

Calculation Example

Let’s walk through a real-world example to make this crystal clear. Suppose:

  • The current currency exchange rate (CER) is 1.3500
  • The Average 1 Month ATR (in decimal form) is 0.07

Here's how you would calculate the ATR Stop Loss:

\[ \text{ATR Stop Loss} = 1.3500 * (1 – 0.07) \]
\[ \text{ATR Stop Loss} = 1.3500 * 0.93 \]
\[ \text{ATR Stop Loss} = 1.2555 \]

So, your ATR Stop Loss would be 1.2555. This suggests that if the currency exchange rate drops to or below 1.2555, it's a signal to sell and cut your losses.

What Exactly Does This Mean for You?

Knowing how to calculate and utilize the ATR Stop Loss can significantly enhance your trading strategies. It enables you to limit potential losses by setting a predefined exit point. Plus, it helps you better understand market volatility, which is key to making informed trading decisions.

Got questions? Want to give it a try? Use our intuitive calculator to get instant results and make more informed trading decisions. Happy trading!