I have read a few articles recently regarding traders who use the Average True Range (ATR) to formulate a stop loss system. Essentially, from what I understand the ATR looks at the volatility or “noise” in the market over a set period of time.

Setting a stop loss is a grey area for me, as it seems there are no hard and fast rules. One article for example, suggested obtaining the ATR for the last 20 days, using a multiple of this (e.g. multiplying this by 2), and setting the stop loss just below this figure.

However, within this article, the author provides an example of a “one dollar stock that moved five cents on average over the last 20 days”. My charting package has a facility to implement the ATR, but displays this in the form of a graph for the last 20 days instead of producing a figure. Therefore, how would I obtain the average figure of “five cents” as per the example? Would it simply be a case of adding the highest Average True Range figure to the lowest Average True Range for that period from the graph and dividing this by two?

If anyone has any knowledge of this, or uses this system, your advice would be much appreciated.

Regards.