Using ATR for Volatility-Adjusted Sizing and Stop Placement
Summary
The document defines average true range as an average of true ranges, where each true range is the largest of the current high-low span and the distances from the prior close to the current high or low. Including prior-close gaps makes ATR more informative than a simple bar range. It describes shorter lookbacks for recent volatility and longer ones for a broader view.
Its applications include scaling position sizes so that a one-ATR move has a similar portfolio impact across instruments, setting stops at a chosen ATR multiple, and recalculating positions as volatility changes. Examples compare two equities with different ATRs to show how equal ATR-based risk can imply different share counts and percentage stop distances. The document presents these as general techniques rather than tested performance results. It does not specify a universally suitable lookback or multiplier, and volatility-based sizing and stops do not remove market risk or guarantee that losses will stay within the intended amount.
Key ideas
- True range accounts for gaps by comparing the daily range with both distances from the previous close.
- ATR multiples can scale stop distances to the volatility of each instrument.
- Sizing positions so one ATR represents a similar portfolio risk can reduce the influence of more volatile holdings.
- Recalculating share counts as ATR changes creates a volatility-responsive position size.
- ATR settings and multipliers depend on the trader's horizon, and the method does not eliminate market risk.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.