Why three? You want a sensitive indicator that reflect both the long term of the equity as well as what that is right now. Obviously the most recent trading days are the most important. The three ATR periods and their weighting factors are:
1) We use a 251 day period which equates to 1 trading year because we want to know what the is. This one year period is not weighted.
2) We utilize a 21 day period because the most recent weeks tells us what the stock has been over the previous calendar month. This is weighted by a factor of 2.
3) Finally, we utilize the last weeks data, Last 5 days, (L5D) to provide us with the stocks movement in the most recent trading days. This is weighted by a factor of 4.
The total of ATR251*(1) + ATR21*(2) + ATR5*(4) is then divided by the total of all factors (7).
This results in the Weighted that the Trade Risk Reduction utilizes to produce the dynamic bands on your charts as well as power the Risk and Stop loss calculators. These indicate where this indicator is currently recommending you place stops. In the Format options of the application you are provided with the ability to adjust these band. Keep in mind that each stock will act in it's own unique and characteristic way. Looking closely at the stock's historical data, both in longer and shorter time periods should provide you with some insight into the normal variations and fluctuations of this particular equity. Below EBAY provides an example of this.
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