ATR Trailing Stops are a way of using the principles behind Average True Range - a measure of the degree of price volatility - and using it to set trailing stop-losses.
The idea is that ATR gives a guide to the average volatility of price movements over a given period, making it easier to be more precise about where to set the stop-loss.
True Range is calculated by looking at the daily price change and using the greater of three calculations: (high – previous close), (previous close – low) or (high – low).
In the case of ATR Trailing Stops, the Average True Range is the True Range calculation over a default 21-day period average.
A multiple of the ATR - in this case a default multiple of 3 - is plotted around the ATR line. Welles Wilder, who invented the ATR Trailing Stop preferred ATR multiple of 3.
These settings can be adjusted by launching the ATR Stops settings modal.
The ATR Trailing Stop is plotted above (or below) the price when the stock is in a downtrend (or uptrend). For example, if the stock price was 100p, the Average True Range was 2p and a trader chose an ATR multiple of 3, then the Trailing Stop would be plotted at 94p during an uptrend (ie. 100p - ( 2p x 3 )). Conversely, during a downtrend the Trailing Stop would be plotted at 106p (ie. 100p + ( 2p x 3 )).