ATR for Position Sizing and Stop Placement: Basics

ATR in Plain English

Average True Range (ATR) measures how much price typically moves per bar. Higher ATR means more volatile markets; lower ATR means quieter conditions. Because it adapts as volatility changes, ATR is a practical yardstick for where to place a stop-loss and how large a position to take.

A stop-loss is a predefined exit intended to limit a trade’s loss. Position size is the number of shares, contracts, or lots you trade. Linking both to ATR keeps your risk proportional to current market conditions instead of using arbitrary fixed distances.

New to ATR? See our quick primer: Average True Range (ATR) Simply Explained.

ATR-Based Stop Placement

The idea: set stops far enough away to survive normal noise but close enough to exit when your trade thesis breaks.

• Common approach: place the stop one to two ATRs beyond your invalidation level (for example, below a swing low when long, or above a swing high when short).
• No clear structure? Use a fixed multiple from entry (e.g., 1× ATR). Prefer structure first, multiple second.
• Adjust the multiple to your style: tighter for scalps, wider for swing trades or fast markets.

Simple example

Suppose a stock trades near 50.20 and the 14-period ATR on your timeframe is 1.20. You plan a long entry at 50.20, and your invalidation is a recent swing low at 49.60. Placing the stop one ATR below that swing low puts it near 48.40. This gives the trade room relative to current volatility while marking a clear point where your idea is likely wrong.

Key reminder: ATR guides distance, but structure (swing highs/lows, key levels) defines where the trade thesis fails. Use both.

Position Sizing with ATR

Position sizing ties your trade quantity to how far the stop is from entry so that your maximum loss stays within a chosen limit.

1. Choose a fixed dollar risk per trade (for example, 1% of account balance).
2. Set the stop using your ATR method (structure plus an ATR buffer, or a simple ATR multiple).
3. Find the per-unit risk: the difference between entry and stop.
4. Calculate quantity so the potential loss at the stop is at or under your risk limit. Round down to a practical size.

Walk-through

Account: $5,000. Risk per trade: 1% ($50). Entry: 50.20. Stop: 48.40. Per-share risk is roughly 1.80. To keep loss near $50, trade about 27 shares; rounding down to 25 further reduces risk. If markets are very fast or spreads are wide, reduce size again to account for slippage.

For futures or FX, the logic is identical: determine ATR-based stop distance in ticks or pips, multiply by tick/pip value to estimate per-contract risk, then scale contracts to fit your risk limit.

Practical Tips and Common Mistakes

• Pick one ATR length and timeframe per strategy. The classic 14-period works as a starting point; adjust only after testing.
• Don’t use fixed stops across all markets or sessions. Re-estimate ATR when volatility changes.
• Avoid tiny stops that sit inside normal ATR noise. If you must go tight, reduce size accordingly.
• Never widen a stop mid-trade without resizing the position; this quietly increases risk.
• Plan ATR-based trails: for example, move the stop to break-even after favorable movement, then trail by 1–2 ATR behind structure.
• Record ATR, stop distance, and position size in your journal. Review outcomes to refine your multiples.

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