ATR-based Trailing Stop Strategy for ES

Overview

This strategy is a trailing stop strategy applied to the E-mini S&P500 futures (ES). It uses 10-day ATR as a reference and sets the stop loss range to 3 times ATR to define long and short stop lines. The strategy judges the trend by the direction change of the ATR lines and generates entry signals at turning points of the trend. Once entered, it will adjust the stop loss lines in real time to trail the price movement, protecting profits.

Strategy Logic

The strategy uses hl2 as the price source. First it calculates the 10-day ATR, and lets the user choose between using SMA method or built-in ATR function to calculate ATR. After obtaining ATR, it adds 3 times ATR up and down to form the range. The two range lines are the stop loss lines.

The method to judge the trend is when the price exceeds the upper boundary, it is long; when the price breaks the lower boundary, it is short. When the price retraces back into the range, it confirms the trend reversal. At this time, if turned from short to long, it will generate a long entry signal; if turned from long to short, it will generate a short entry signal.

After entering, the long stop loss line is set to the upper boundary minus 1 tick, and the short stop loss line is set to the lower boundary plus 1 tick, trailing to protect profits.

Advantages

1. Using ATR can automatically adapt to changes in market volatility and reduce the probability of stop loss being triggered.
2. The trend tracking method is simple and effective to avoid risks of chasing tops and bottoms.
3. Trailing stops lock in profits and avoid giving back profitable trades.

Risk Analysis

1. Improper ATR parameter setting may cause the stop loss range to be too large or too small.
2. Drastic changes in the volatility of the underlying may cause abnormal stop loss triggering.
3. TRAILING stops may be too conservative to keep tracking the trend.

Optimization Directions

1. Consider optimizing ATR parameters combined with volatility metrics.
2. Test different trailing stop algorithms like percentage trailing stops etc.
3. Filter entry signals combined with trend indicators to avoid false trend signals.

Conclusion

In general, this is a robust trend following strategy. It solves the problem of determining stop loss range and reduces risks by adjusting stops dynamically based on ATR. At the same time, trailing stops lock in profits. But there is still room for optimizing parameters like ATR periods, stop algorithms etc. With further testing and tuning, this strategy can become a trend following strategy with high robustness.