ATR ENVELOPE

The ATR Envelope or Average True Range Channel Breakout system is mentioned and tested in Curtis Faith's book, Way of the Turtle. Using the Trading Blox software, Curtis tests this system and others to compare factors that go into building a successful Trend Following system. This system's concept of capturing a trend from the point of a volatility breakout is similar to the Bollinger Band Breakout that Curtis also tests in his book.

ENTRY

ATR Channels are created by adding an ATR multiple to a moving average line. An example is 2 ATR added to a 25 day moving average to create the upper line and 2 ATR subtracted from the 25 day moving average to create the lower line. Putting numbers to the example would be the AAPL 25 day moving average at 603.18 and the 25 day ATR at 15.99. This would put the upper line at 635.16 (603.18 + 31.98) and the lower line at 571.20 (603.18 - 31.98). A long entry occurs when the previous day's price closes above the upper channel. A short entry occurs when the previous day's price closes below the lower channel. Additional positions can be added through pyramiding or in other words, as the trade moves in your favor you put on more positions in steps while moving the stop to the new level.

POSITION SIZING

Curtis mentions that all his tests use the same data and money management but the only type of Position Sizing that he details in his book is what the Turtles used with their Price Channel Breakout System. Detailing that Percent Volatility Position Sizing here, you calculate the value of the distance of the entry price to the stop price. Calculate the amount of risk per trade or percentage of your equity you want to put on the line if the trade goes against you (2% or less in most cases). Divide the amount to be risked by the value of the price distance to the stop, round down to a whole amount available for a position and you'll have your position size. With this position sizing, you account for the market's volatility and have equal risk across all the markets you trade. It also lets you limit your risk if the trade goes against you. When joined with the stop and exits, you are able to cut your losses short and let your profits run.

STOP

If you find that most profitable trades are profitable from the entry without nearing your stop, you can use a tighter stop as Curtis did when he was a Turtle. He mentions that he used a 1/2 ATR stop instead of a 2 * ATR stop.

EXIT

Exit occurs when the price closes on the other side of the moving average line from where the entry occured. For other exits, you can use a Parabolic SAR or exit when the ADX starts dropping however you don't want to exit before the trend is finished.

VARIATIONS

Curtis tests this system with 7 ATR added to a 350 day moving average to create the upper channel line and 3 ATR subtracted from the 350 day moving average to create the lower channel line. While his upper and lower lines differ, you could keep these same parameters or vary them to your preference.

MORE DETAILS

Results of testing this system and comparisons to other systems can be found in Curtis Faith's book, Way of the Turtle.

MetaTrader 4 Backtest this system in MetaTrader 4 for free on the MQL Market.
Buy a compiled version of this system on the MQL Market.
Buy the full code for this system at www.TFmt4.com to automate and test this Average True Range Envelope system using MetaTrader 4.

MetaTrader 5 Backtest this system in MetaTrader 5 for free on the MQL Market.
Buy a compiled version of this system on the MQL Market.
Buy the full code for this system at www.TFmt5.com to automate and test this Average True Range Envelope system using MetaTrader 5.