First what is ATR? Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. It was designed to capture the gaps rather than only focus on the high/low range for the day.
You do not need to calculate this manually, but we have included how the calculation works.
Find the True Range (TR), which is defined as the greatest of the following:
§ Method 1: Current High less the current Low
§ Method 2: Current High less the previous Close (absolute value)
§ Method 3: Current Low less the previous Close (absolute value)
Then take an average, Dan uses 21 days b/c it is roughly one trading month (and a Fibonacci number, Dan is a market geek). Depending on your risk tolerance, you can set the stop below the entry by the ATR or a multiple of it. Dan uses 3 ATRs.
Stockcharts.com supports the functionality to assist with the calculations.
You can also view the previous Monday Open Forum about this topic: