MoneyPlanIt

Lesson 02 · Risk management

ATR Stop Loss and Position Sizing

  • 13 short cards
  • About 6 min to read
  • 5 quiz levels · 30 questions
  • Beginner

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Overview

An ATR stop loss uses the Average True Range, a measure of how much a market normally moves, to place your stop outside everyday price wobbles. Combined with the 1% rule from Lesson 1, it lets you trade calm and lively markets with the same money at risk.

Timeframe
Any (use the ATR of the chart you trade)
Markets
All markets
Difficulty
Beginner

Builds on: Trading for Beginners: The Basics, Position Sizing and the 1% Rule in Trading

See it on a chart

70758085Entry 79.912× ATR stop 76.81Entry1.21.41.6ATR
  • Price (candles)
  • Long signal
  • ATR (14)
  • Entry
  • Stop loss

The stop sits 2 × ATR below the entry. The lower panel shows ATR rising and falling as the market gets livelier or calmer. Prices are made up for illustration.

Try it yourself

ATR position size calculator

The stop is placed a number of ATRs below your entry, then the size is set so the money at risk stays the same.

What is Average True Range (ATR)?

Average True Range was created by J. Welles Wilder in 19781. It measures how much a market typically moves in one candle.

First, each candle gets a true range. It is the biggest of three numbers2: the high minus the low; the distance from the high to the previous close; and the distance from the low to the previous close. Using the previous close means gaps are counted.

ATR is the average true range, usually over the last 14 candles2. It is shown in price units, such as £1.80 or 25 pips. It tells you how big moves are, not which way they go2.

Worked example: one candle’s true range

Yesterday’s close
£53
Today’s high and low
£52 and £50
1. High − low: £52 − £50
£2
2. High to previous close: £53 − £52
£1
3. Low to previous close: £53 − £50
£3
True range = the biggest of the three
£3

The share gapped down from £53. High minus low alone (£2) would miss that gap. ATR is the average of the last 14 true ranges.

How to set an ATR stop loss

A stop that is too close sits inside normal price wobbles. It can get hit even when your trade idea is right.

An ATR stop is placed a set number of ATRs away from your entry, often between 1.5 and 3. In a lively market ATR is large, so the stop is further away. In a calm market it is closer.

A 2 × ATR stop in a calm share and a lively share

ATR2 × ATR stop
Calm share at £50£0.50£1 below entry: £49
Lively share at £50£3.00£6 below entry: £44

The lively share moves more each day, so its stop sits further away, outside its normal wobbles.

Sizing a trade with ATR

Combine the ATR stop with the 1% rule: size = money at risk ÷ (ATR × multiple). A wider stop gives a smaller size, so the money at risk stays the same.

The famous Turtle traders used this idea in the 1980s. They called the average true range “N” and used a 20-day version of it to size every trade3.

Worked example: sizing with ATR

Account £20,000, risk 1%
£200 at risk
ATR is £2. Stop at 2 × ATR
£4 a share
Size: £200 ÷ £4
50 shares
Loss if the stop is hit: 50 × £4
£200

If ATR were £1 instead, the stop would be £2 away and you’d buy 100 shares. Same £200 risk.

Trailing stops and the Chandelier Exit

A trailing stop is a stop loss you move in your favour as the trade makes money, to lock in some of the gain. You never move it backwards.

The Chandelier Exit, developed by Chuck LeBeau, is a trailing stop based on ATR. In its standard form, a long trade’s stop sits at the highest high of the last 22 days minus 3 × ATR4. Some traders measure from the highest high since they entered instead.

A Chandelier Exit for a long trade

  1. Highest high, last 22 days£58.00
  2. Take off 3 × ATR3 × £1.20 = £3.60
  3. Stop£58.00 − £3.60 = £54.40
  4. Each dayMove it up if the sum is higher. Never move it down.

ATR stop and sizing rules

Entry

  • Use any entry rule.
  • When you enter, read the ATR from the chart you trade.
  • Stop = entry − (multiple × ATR) for a long trade. Size = money at risk ÷ (multiple × ATR).

Exit

  • Trail the stop with a Chandelier Exit, or
  • Set profit targets as multiples of ATR.

Risk

  • A wider stop means a smaller size, never more money at risk.
  • Check your sizes again when ATR jumps.
  • ATR doesn’t warn you about unusually big gaps.

Worked example: two shares, the same risk

  1. Share A costs £80 and its ATR is £2.00. A 2 × ATR stop sits £4 below the entry, at £76.
  2. Your account is £20,000 and you risk 1%: £200. Size = £200 ÷ £4 = 50 shares.
  3. Share B also costs £80, but its ATR is only £0.80. Its 2 × ATR stop is £1.60 away, at £78.40.
  4. Size = £200 ÷ £1.60 = 125 shares. The sizes are different, but both risk £200.

Pros and cons of ATR stops

Strengths

  • Stops adjust to how lively each market is.
  • Gives very different markets the same money at risk.
  • Easy to calculate and to automate.

Weaknesses

  • Ignores chart levels such as swing lows unless you combine them.
  • Can underestimate risk before big news.
  • Wide stops mean small sizes and slow exits from losing trades.

Key terms

True range
The biggest of: high − low, the gap from high to previous close, and the gap from low to previous close.
ATR
Average True Range: the average true range, usually over 14 candles.
ATR multiple
How many ATRs your stop sits from your entry, such as 2.
Trailing stop
A stop moved in your favour as a trade profits, never backwards.
Chandelier Exit
A trailing stop set at the 22-day high minus 3 × ATR, in its standard form.
Turtle “N”
The Turtle traders’ name for their 20-day average true range.

Lesson complete

You have reached the end of the lesson. Now test what you learned with the five-level quiz.

Start the quiz

Quiz zone

Test yourself: ATR Stop Loss and Position Sizing quiz

Five levels, from the basics to expert judgment. Clear each level to unlock the next.

  1. Level 1: Foundations. Recognise the strategy and its vocabulary.
  2. Level 2: Mechanics. Know how the signals and rules work, and why.
  3. Level 3: Application. Apply the rules to realistic chart situations.
  4. Level 4: Numbers & risk. Size, measure and manage the trade with real calculations.
  5. Level 5: Mastery. Judge edge cases, failure modes and market conditions.

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See all 30 questions in this quiz

The questions only. Answers and explanations appear when you take the quiz above.

Level 1: Know what ATR measures

  1. What does ATR (Average True Range) measure?

    • Which way the price is heading
    • How many shares were traded
    • How much a market usually moves in one candle
    • The average closing price

  2. True or false: a rising ATR means the price is going up.

    True or false?

  3. How many candles does the standard ATR average over?

    • 200
    • 50
    • 14
    • 5

  4. What is a trailing stop?

    • An order to buy more when price rises
    • A stop that follows the price down when it falls
    • A stop loss you move in your favour as the trade makes money, never backwards
    • A stop placed after the trade closes

Level 2: Understand how it works

  1. Why does true range use the previous close?

    • Because the open price isn’t reliable
    • To make the number smaller
    • So gaps are counted, which high minus low would miss
    • To make ATR show direction

  2. In a livelier market, what happens to an ATR stop?

    • You stop using a stop
    • It sits closer, so you buy more
    • It stays the same distance
    • It sits further away, and you buy fewer shares so the money at risk stays the same

  3. True or false: ATR is shown in price units, such as pounds or pips, not as a percentage.

    True or false?

  4. For a long trade, where does the standard Chandelier Exit put the stop?

    • 3 × ATR above your entry
    • 1% below your entry
    • At the lowest low of the last 22 days
    • 3 × ATR below the highest high of the last 22 days

  5. The Turtle traders called their 20-day average true range “N”. What did they use it for?

    • To time their entries to the minute
    • To pick which shares to buy
    • To size every trade
    • To set their commission

Level 3: Use ATR in real trades

  1. Share A has an ATR of £0.50. Share B has an ATR of £3.00. Both cost £100. You use a 2 × ATR stop and risk 1% on each. Which is true?

    • B risks more money than A
    • You buy far more of B than of A
    • You buy the same amount of each
    • You buy far more of A than of B

  2. Your trailing stop moved up from £46 to £52 yesterday. Today ATR jumps, and the formula gives £51. What do you do?

    • Keep the stop at £52
    • Remove the stop
    • Move it down to £51
    • Move it to £46

  3. Before a big interest-rate announcement, markets are calm and ATR is low. What is the danger of a tight 1 × ATR stop?

    • ATR will be cancelled during the news
    • Your stop will move by itself
    • The news could move price several ATRs at once, so ATR understates the risk
    • There’s no danger: low ATR means low risk

  4. The daily ATR is 40 pips, but you trade on 5-minute charts. What should you use for your 2 × ATR stop?

    • The ATR from the 5-minute chart
    • No stop on short charts
    • The daily ATR: 80 pips
    • Half the daily ATR

  5. How many ATRs from entry do most ATR stops sit?

    • Exactly 10
    • Between 1.5 and 3
    • It must always be exactly 1
    • Less than 0.5

  6. Why can a very close stop lose you money even when your trade idea was right?

    • A close stop makes you buy fewer shares
    • Brokers ignore close stops
    • Normal price wobbles can hit it before the move you expected
    • Close stops cost more commission

Level 4: Work out ATR stops and sizes

  1. A candle has a high of £52 and a low of £50. The previous close was £53. What is the true range, in pounds?

    Type a number.

  2. ATR is £1.50 and you use a 2 × ATR stop. How far below your entry does the stop go, in pounds?

    Type a number (below entry).

  3. You buy at £40. ATR is £1.50 and you use a 2 × ATR stop. At what price is your stop?

    Type a number.

  4. Your account is £20,000 and you risk 1%. ATR is £2 and your stop is 2 × ATR. How many shares should you buy so that hitting your stop loses only 1%?

    Type a number (shares).

  5. Your account is £10,000 and you risk 1%. ATR is £0.80 and you use a 2.5 × ATR stop. How many shares so that hitting your stop loses only 1%?

    Type a number (shares).

  6. The highest high of the last 22 days is £58. ATR is £1.20 and you use a 3 × ATR Chandelier Exit. Where is the stop, in pounds?

    Type a number.

  7. Gold: your account is £50,000 and you risk 0.5%. ATR is £18 an ounce and you use a 1.5 × ATR stop. How many ounces can you buy? Round down.

    Type a number (ounces).

Level 5: Use volatility wisely

  1. Why did the Turtle traders size every trade using N, their version of ATR?

    • To avoid paying commission
    • So each trade moved by a similar amount of money, giving very different markets equal risk
    • To trade as many contracts as possible
    • Because N predicted the direction of price

  2. ATR doubles during a sell-off. Your position was sized using the old ATR. What should you think about?

    • Remove the stop until things calm down
    • Nothing: once sized, always sized
    • Buy more, because prices are cheaper
    • The position now swings about twice as much as planned; many traders cut the size

  3. What is the downside of very wide stops, such as 5 × ATR?

    • You lose more money at the stop
    • Smaller positions, slower exits from losing trades, and less reward for the risk
    • There’s no downside
    • Brokers don’t allow them

  4. A trader uses 2 × ATR stops but always buys 100 shares. What goes wrong?

    • Lively shares now risk far more money than calm ones
    • Calm shares risk more than lively ones
    • Nothing: it’s simpler
    • The stops won’t trigger

  5. What can ATR not warn you about?

    • How far to put a stop
    • How much the market moved recently
    • Unusually big gaps, such as after surprise news
    • Whether the market has been calm or lively

  6. Your stop is 2 × ATR from entry and your target is 4 × ATR. If both are hit as planned, what is the reward compared with the risk?

    • 0.5R
    • 4R
    • 1R
    • 2R: you make twice what you risked

  7. Two traders use the Chandelier Exit. One measures from the 22-day high, the other from the highest high since they entered. When can these give different stops?

    • Only when ATR is zero
    • When the highest point of the last 22 days came before the trade started
    • Never: they always match
    • Only for short trades

  8. Which is the best summary of why traders use ATR stops?

    • They fit the stop to how much the market normally moves, while the size keeps the money at risk the same
    • They show which way the market will go
    • They let you skip the 1% rule
    • They guarantee a win

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