ATR Stop
Category
Risiko- & Money-Management
Sub-category
Stop-Loss-Methodik
Curated by
Last reviewed
An ATR stop is a stop-loss whose distance is derived from the Average True Range (ATR) – usually as a multiple such as 2×ATR. For a stock at $50 with an ATR(14) of $1.50, a 2×ATR stop sits at $47. The stop thereby adapts to market volatility: further away in turbulent phases, tighter in calm ones – instead of being set arbitrarily.
Context & Mechanics
Definition and calculation
An ATR stop couples the stop-loss to market volatility. The basis is J. Welles Wilder's Average True Range (ATR): the moving average of the true range – the actual trading range including gaps – over typically 14 periods. The stop is set as a multiple: entry $50, ATR(14) = $1.50, factor 2 → stop at 50 − 3 = $47. Common factors range from 1.5 (tight, for short-term setups) to 3 (wide, for swing positions).
Why volatility-based stops?
Fixed stops ("always 2 %") ignore the market state: in calm phases they are unnecessarily wide, in volatile ones they get stopped out by normal market noise without the trade idea being invalidated. The ATR stop solves this structurally – it gives the trade as much room as the market currently fluctuates. Coupling to position sizing is essential: the stop distance determines the share count, not the other way round. With $1,000 risk and a $3 stop distance the position is 333 shares; if the ATR doubles, the position halves – the euro/dollar risk stays constant.
Variants
Besides the fixed initial stop, the ATR is often used for trailed stops (a trailing stop at ATR distance, known as the chandelier exit). Break-even stops can also be timed ATR-based, e.g. moving to entry after +1×ATR of price progress.
Why it matters for traders
ATR stops replace gut feeling with a reproducible rule and thereby stabilise the loss side of the journal – the average loss stays near 1R. In prop-firm rulebooks with a daily loss limit this consistency is especially valuable. In the GlanWick simulator, ATR factors can be tested against historical data by way of example – GlanWick is a training and simulation tool and not a prop firm itself.
Execution Example
A trader buys a stock at $50 on a $100,000 account with $1,000 risk per trade (1R). The ATR(14) is currently $1.50; the stop factor is defined as 2×ATR.
- Stop distance: 2 × $1.50 = $3 → stop at $47.
- Position sizing: $1,000 risk ÷ $3 = 333 shares (≈$16,650 position value).
- Volatility surge: if the ATR rises to $3, the stop distance is $6 → only 166 shares – the risk stays exactly $1,000.
- Comparison: a fixed $1.50 stop would most likely have been triggered by market noise in the volatile phase although the trade idea was intact.
Execution Risk & Errors
Setting the ATR stop but not adapting position size to the stop distance
Keeping the share count in volatile phases and thereby multiplying the money risk
Choosing factors that are too tight (below 1.5) and getting stopped out by normal noise
Constantly changing the ATR period until the backtest fits
Using ATR stops in illiquid markets without regard to slippage and gaps
Frequently Asked
Which ATR factor is common?
Historically widespread are 1.5 to 3: tighter for short-term setups, wider for swing positions. The factor should fit the setup and stay consistent instead of being re-chosen per trade.
What distinguishes an ATR stop from a percentage stop?
A percentage stop is equally far away in every market phase. The ATR stop scales with the current fluctuation range and gives the trade exactly as much room as the market currently needs.
How does the ATR stop relate to position size?
The stop distance determines the share count: risk per trade ÷ stop distance = position. If the ATR widens, the position shrinks – the money risk stays constant.
Does the ATR stop also work as a trailing stop?
Yes, as the so-called chandelier exit: the stop follows the highest price since entry at a fixed ATR distance and only moves up, never back.