Average True Range Stop
A stop-loss level set at a multiple of the Average True Range to account for normal market volatility and avoid premature stop-outs.
Formula
ATR Stop Level = Entry − (ATR Multiplier × ATR)
An ATR-based stop places the stop-loss at a distance from entry equal to a multiple of the Average True Range (typically 1.5–3×ATR). Because ATR measures actual recent volatility, the stop automatically widens during turbulent markets and tightens in quiet ones — adapting to current conditions.
Fixed-dollar or fixed-percentage stops ignore volatility; an ATR stop recognises that a $0.50 move in a $0.25-ATR stock is huge noise, while in a $2-ATR stock it is trivial. The position size is then calculated from the ATR stop distance to keep dollar risk constant.
Example
Stock has a 14-period ATR of $1.80. Entry at $40. ATR stop (2×) placed at $40 − $3.60 = $36.40. Risk capital $100: position size = $100 / $3.60 = 27 shares.
Related Terms
Maximum Adverse Excursion (MAE)
The furthest a trade moves against you before it either recovers and wins or hits the stop-loss.
AdvancedPosition Sizing
Calculating exactly how many shares, contracts, or lots to trade so that a stop-out costs no more than your chosen risk percentage.
BeginnerStop-Loss
A pre-set price level at which a losing trade is closed to cap the damage before it grows larger.
BeginnerVolatility-Based Sizing
Adjusting position size inversely to market volatility so that each trade has a consistent dollar risk regardless of how much the asset moves.
Intermediate