Average True Range (ATR) is one of the most valuable tools for setting intelligent stop losses. Instead of using arbitrary percentages or dollar amounts, ATR-based stops adapt to the actual volatility of what you are trading. This guide covers everything you need to know about using ATR for stop loss placement.
What is Average True Range (ATR)?
ATR measures volatility by calculating the average range of price movement over a specified period. It accounts for gaps, which regular high-low ranges miss. Developed by J. Welles Wilder, ATR tells you how much an asset typically moves, not which direction it moves.
True Range is the greatest of:
- Current high minus current low
- Absolute value of current high minus previous close
- Absolute value of current low minus previous close
ATR is the average of True Range over n periods (typically 14).
Why Use ATR for Stop Losses?
ATR-based stops offer several advantages over fixed stops:
- Adaptive: Automatically adjusts to current volatility
- Asset-appropriate: Works for any stock, ETF, or futures contract
- Timeframe-flexible: Scales correctly on any chart timeframe
- Market-aware: Wider stops in volatile periods, tighter in calm ones
- Objective: Based on actual data, not emotions or guesses
The ATR Stop Loss Formula
Long Position Stop: Entry Price - (ATR x Multiplier)
Short Position Stop: Entry Price + (ATR x Multiplier)
Example Calculation
Stock XYZ trading at $100 with 14-period ATR of $3.50
- Entry price: $100
- ATR: $3.50
- Multiplier: 2.0
- Stop distance: $3.50 x 2.0 = $7.00
- Stop price (long): $100 - $7.00 = $93.00
Choosing the Right ATR Multiplier
The multiplier determines how much room you give the trade. Different trading styles need different multipliers:
Multiplier Guidelines
- 1.0x ATR: Very tight, for scalping. High chance of being stopped out.
- 1.5x ATR: Tight, for aggressive day trading.
- 2.0x ATR: Standard, the most common choice for swing trading.
- 2.5x ATR: Moderate, gives more room in trending markets.
- 3.0x ATR: Wide, for position trading and strong trends.
- 4.0x ATR: Very wide, for long-term trend following.
Factors Affecting Multiplier Choice
- Trading style: Shorter timeframes need tighter stops
- Win rate: Lower win rate strategies need wider stops
- Market conditions: Trending markets can use wider stops
- Your psychology: Choose what you can stick with
ATR Period Selection
The lookback period affects how responsive ATR is to recent volatility changes:
- 7-10 periods: More responsive, captures recent volatility quickly
- 14 periods: Standard, balances responsiveness with stability
- 20-22 periods: Smoother, filters out short-term volatility spikes
Period Impact
After a volatile week, a stock's ATR values might be:
- 7-period ATR: $5.00 (reflects recent volatility)
- 14-period ATR: $4.00 (moderate reflection)
- 20-period ATR: $3.50 (smoothed out)
Choose based on how quickly you want your stops to adjust.
ATR Stops in Different Market Conditions
Trending Markets
In strong trends, use wider ATR multipliers (2.5-3.5x) to avoid being shaken out by normal pullbacks. The trend will likely resume after minor retracements.
Range-Bound Markets
In sideways markets, tighter stops (1.5-2x ATR) can work better. Breakouts in ranges often fail, and quick exits preserve capital.
High Volatility Periods
When ATR spikes, your stops automatically widen. This is a feature, not a bug. However, consider reducing position size to maintain consistent dollar risk.
Low Volatility Periods
When ATR contracts, stops get tighter. Be aware that low volatility periods often precede big moves. Consider using slightly wider multipliers during these times.
ATR Trailing Stops
ATR works excellently for trailing stops as well as initial stops:
Fixed ATR Trail
Trail your stop at a fixed ATR distance from the highest high (for longs) or lowest low (for shorts).
ATR Trailing Stop Example
Long trade with 2x ATR trail, current ATR is $2.00
- Entry at $50, stop at $46
- Price reaches $55, stop moves to $51
- Price reaches $60, stop moves to $56
- Price drops to $56, stop is hit with $6 profit
Dynamic ATR Trail
Recalculate ATR regularly and adjust the trail distance. As ATR changes, so does your stop distance. This provides the ultimate adaptability.
Position Sizing with ATR Stops
ATR stops naturally integrate with proper position sizing:
Position Size Formula:
Shares = (Account Risk Amount) / (ATR x Multiplier)
Position Sizing Example
Account: $100,000, Risk per trade: 1% ($1,000)
Stock price: $50, ATR: $2.00, Multiplier: 2x
- Stop distance: $2.00 x 2 = $4.00
- Position size: $1,000 / $4.00 = 250 shares
- Position value: 250 x $50 = $12,500
Combining ATR with Other Stop Methods
The best traders often combine ATR stops with technical levels:
ATR and Support/Resistance
- Calculate your ATR-based stop distance
- Identify the nearest support level
- If support is within your ATR range, use support
- If support is beyond your ATR range, consider skipping the trade
ATR Minimum Distance
Some traders use ATR as a minimum stop distance. Even if support is very close, they ensure the stop is at least 1x ATR away to avoid noise.
Optimize Your ATR Stop Settings
Pro Trader Dashboard tracks your actual trade data and can show you how different ATR multipliers would have performed on your trades. Find the settings that work best for your strategy.
Common ATR Stop Mistakes
- Not adjusting position size: Wider stops require smaller positions
- Using the wrong period: Match ATR period to your trading timeframe
- Ignoring context: ATR is a tool, not a complete system
- Static multipliers: Consider adjusting multiplier for different conditions
- Forgetting about gaps: ATR accounts for gaps but cannot prevent them
ATR Stop Checklist
- Check the current ATR value for your asset
- Choose an appropriate multiplier for your trading style
- Calculate the stop distance (ATR x multiplier)
- Determine stop price (entry minus stop distance for longs)
- Calculate position size based on stop distance and account risk
- Place your order
- Optionally, set up ATR trailing stop for profit protection
Summary
ATR-based stops are among the most effective tools for risk management. They automatically adapt to market volatility, work on any asset and timeframe, and integrate seamlessly with position sizing. Start with a 14-period ATR and 2x multiplier, then adjust based on your results. Track your trades to find the optimal settings for your specific strategy. When combined with proper position sizing and technical analysis, ATR stops can significantly improve your trading results.
Ready to learn more? Check out our guide on volatility-based stops or learn about the Chandelier Exit strategy.