Track 2 · Lesson 5 · 6 min
Volatility, ATR and trailing stops
How plays measure a stock's normal wiggle, and how stops built on it decide when a trend is over.
ATR: a ruler for normal movement
A $5 move means nothing for a $700 index fund and everything for a $10 stock. To set sensible levels, plays need to know how much a stock normally moves. The standard ruler is J. Welles Wilder's Average True Range (ATR), from his 1978 book. The true range is the day's high minus its low, stretched to include any gap from the previous close; the ATR averages it over 14 or 20 days.
How far a normal day goes
Live, as of the latest close.
| Stock | Last close | 20-day ATR | ATR as % of price | A 3-ATR stop sits |
|---|---|---|---|---|
| SPYS&P 500 ETF | $778.01 | $6.28 | 0.8% | 2.4% |
| AAPLApple | $341.27 | $6.90 | 2.0% | 6.1% |
| NVDANvidia | $228.52 | $5.83 | 2.6% | 7.7% |
| TSLATesla | $375.23 | $11.71 | 3.1% | 9.4% |
| BTCBitcoin | $83,095 | $2,160.57 | 2.6% | 7.8% |
| OPTTOcean Power Technologies | $0.720 | $0.400 | 55.5% | 166.5% |
Standard deviation and Bollinger Bands
The other common ruler is the standard deviation of recent closes: how spread out they've been around their average. John Bollinger's bands sit two standard deviations above and below a 20-day average, so they widen when the market gets jumpy and squeeze together when it goes quiet. Bollinger's own view is that a close outside the bands usually means the move is continuing, and that a squeeze often comes before a big move.
Trailing stops
A trailing stop is an exit level that follows the price up but never moves down. It turns "when does this trend end?" into a number. Several plays here are built around one:
- Chandelier Exit (Chuck LeBeau): three ATRs below the highest high of the last 22 days, hanging from the top like a chandelier from the ceiling.
- Supertrend: a line three ATRs from the middle of each day's range that only ratchets in the trend's direction.
- Parabolic SAR (Wilder): starts loose, then tightens a little faster every time price makes a new high, so it gets out quickly once a trend stalls.
- Clenow's trend model: exits when the close falls three ATRs below the best close since entry.
Apple with the Chandelier Exit, last two years
The stop hangs three ATRs below the 22-day high. It rises with new highs and falls back only as the old high drops out of the window.
Tight or loose?
Every stop is a trade-off. A tight stop cuts each loss quickly but gets shaken out by ordinary wiggles, so you trade more and pay more costs. A loose stop sits through the noise and rides trends longer, but gives back more of each gain before it triggers. Setting stops in ATRs at least makes the trade-off the same for a quiet utility and a wild micro cap.
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