How does a limited ATR trailing stop differ from a standard ATR stop?

A limited ATR trailing stop is designed to adjust with the price movement of an asset while providing a ceiling on how low it can move to safeguard profits. This mechanism helps traders lock in gains by ensuring that if the price retreats, the stop-loss does not fall below a previous stop level. This prevents excessive loss and potentially allows the trader to exit the position profitably if the price turns against them.

In contrast, a standard ATR stop adjusts continuously based on the Average True Range, which means it can fluctuate more freely without a defined limit on how low it can fall. While both methods use the ATR to determine volatility and set dynamic stop levels, the limitation in the trailing stop allows for more conservative risk management, focusing on preserving capital once the asset has moved favorably.

The other answer choices do not accurately describe the mechanics of a limited ATR trailing stop in comparison to a standard ATR stop. They may misrepresent how adjustments work, suggest conditions that don’t typically apply to trailing stops, or focus on trading styles that don’t necessarily define the use of these stops.