Introduction to the Mod ATR Trailing Stop Loss Indicator
One method traders use to identify trend direction and trend reversals is with the use of a multiple of the Average True Range (ATR). Traders simply multiply the ATR with a fixed multiplier and mark a distance opposite the direction of the trend coming from the extreme of price in the direction of the trend. The assumption is that price action should not reverse against its price extreme by more than a certain multiple of the ATR or else the trend would be void. The Mod ATR Trailing Stop Loss Indicator is based on this concept of using ATR to identify trend.
What is the Mod ATR Trailing Stop Loss Indicator?
The Mod ATR Trailing Stop Loss Indicator is a custom technical indicator which is a trailing stop loss indicator based on the Average True Range (ATR).
It plots a green line below price action to whenever the market is in an uptrend to indicate the level where price is very unlikely to reach as long as the market is still in an uptrend.
Inversely, it also plots a red line above price action if the market is in a downtrend. This indicates the level where price is unlikely to breach as long as the downtrend is still in place.
How the Mod ATR Trailing Stop Loss Indicator Works?
The Mod ATR Trailing Stop Loss Indicator uses an underlying ATR to compute for the distance between price action and the trailing stop loss. It multiplies the ATR with a multiplier or coefficient and plots the line. In an uptrend, it would subtract the product from the latest high to indicate the trailing stop loss line. In a downtrend, it would instead add the product to the low to plot the trailing stop loss level.
How to use the Mod ATR Trailing Stop Loss Indicator for MT5
This indicator has two variables that can be used to modify the distance of the trailing stop loss line.
“Period” refers to the number of bars the indicator would use to compute for the ATR.
“Coefficient” refers to the multiplier used to measure the distance between the extreme price of the trend and the trailing stop loss.
Although this indicator was developed to indicate a trailing stop loss, it can also be used to identify trend direction and trend reversals. Traders would simply look at the location of price action in relation to the line and trade in the direction of the trend.
Buy Trade Setup
When to Enter?
Price action should be above the green line. Wait for price to retrace near the green line. Open a buy order as price action shows signs of a bullish momentum reversal. Set the stop loss below the green line.
When to Exit?
Close the trade as soon as price action shows signs of a bearish reversal.
Sell Trade Setup
When to Enter?
Price action should be below the red line. Wait for price to retrace near the red line. Open a sell order as price action shows signs of a bearish momentum reversal. Set the stop loss above the red line.
When to Exit?
Close the trade as soon as price action shows signs of a bullish reversal.
Conclusion
Although the Mod ATR Trailing Stop Loss Indicator was developed for the purpose of identifying clear stop loss levels, it is still an excellent trend following indicator. Traders can use this to filter out low probability trades going against the trend and wait for opportunities near these lines.
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