Using Average True Range to Set Volatility-Scaled Stops and Targets
Summary
The article presents Average True Range (ATR) as a measure of price volatility rather than market direction. It describes ATR as an average of true ranges, which account for the high-low span and gaps from the previous close. The central argument is that a fixed-distance stop may be too wide in quiet conditions or too tight when volatility rises, potentially exiting a position during ordinary price movement.
The proposed approach is to set a stop at roughly 1.5 to 2 times ATR from the entry, and to use the day’s ATR as a reference when considering profit targets. These are practical rules of thumb, illustrated with gold examples, rather than results from a systematic test. ATR does not predict direction or guarantee that a stop avoids losses; the document gives little detail on timeframe selection, position sizing, gap risk, or how to validate multipliers across instruments and strategies.
Key ideas
- ATR measures the size of recent price movement, not its direction.
- True range accounts for the current high-low span and gaps from the previous close.
- A fixed-distance stop does not adjust to changing volatility.
- The article suggests placing stops roughly 1.5 to 2 ATR from entry.
- ATR can inform profit-taking, but the suggested rules are not supported by comparative testing in the document.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.