An ATR stop sets the stop-loss a fixed multiple of the average true range (ATR) away from the entry price or a recent high, so the distance adapts to how much the stock normally moves. A volatile stock gets a wider stop and a quiet stock a tighter one.
How it works
ATR, introduced by J. Welles Wilder in 1978, measures a stock's typical daily range including gaps. Each day's true range is the largest of three values:
- today's high minus today's low;
- the distance from the previous close to today's high;
- the distance from the previous close to today's low.
ATR(n) smooths the true range over n days. Wilder's method updates it as ATR today = (ATR yesterday × (n − 1) + true range today) ÷ n; his standard length is 14 days. Some platforms use a simple or exponential average instead, so ATR values can differ slightly between charting tools.
Two stop designs are common:
- Fixed initial stop: entry − k × ATR, set on the entry day. Multiples of 1.5 to 3 are typical. The Turtle trading rules, for example, used a stop of two times a 20-day ATR (which they called N).
- Trailing stop: the chandelier exit, popularized by Chuck LeBeau, hangs the stop from the highest high: highest high of the last 22 days − 3 × ATR(22). It moves up as the stock makes new highs and never moves down. Other ways to trail a stop are compared in trailing stop.
Because the per-share risk is k × ATR, ATR stops plug directly into position sizing: shares = account risk ÷ (k × ATR). See stop-loss and position sizing.
How to read it
- The multiple sets the trade-off. A small multiple keeps losses small but gets stopped out by ordinary noise more often; a large multiple survives noise but means fewer shares for the same dollar risk.
- Match the time frame. Daily ATR suits trades held for days or weeks; longer holding periods call for weekly ATR or a larger multiple.
- Compare ATR as a percentage of price. An ATR of $2 is large for a $20 stock (10%) and small for a $400 stock (0.5%).
- Combine with structure. Many traders check that an ATR stop also sits beyond a meaningful support level, rather than just above it.
Worked example (illustrative numbers)
True range first. Yesterday's close is $50.00; today's high is $52.00 and low $50.50. High minus low is $1.50, high minus previous close is $2.00, and the distance from the previous close to the low is $0.50, so the true range is $2.00. The gap up counts.
Now two stocks, both at $100, with an account risk of $600 per trade and a 2 × ATR stop:
| Stock A | Stock B | |
|---|---|---|
| ATR(14) | $1.50 | $4.00 |
| Stop (entry − 2 × ATR) | $97.00 (3% away) | $92.00 (8% away) |
| Shares = $600 ÷ risk per share | 200 | 75 |
| Position value | $20,000 | $7,500 |
Both trades risk the same $600. The volatile stock simply gets a smaller position. If stock B later rises to a 22-day high of $120 with ATR(22) at $4.50, a chandelier stop sits at $120 − 3 × $4.50 = $106.50.
Limitations and common mistakes
- Gaps. An ATR stop is still a stop order; news can open the stock far below it. See stop vs stop-limit orders.
- ATR lags. After a shock, ATR rises over several days, so stops widen after the volatility has already arrived.
- Earnings. A report can move a stock several ATRs in one session.
- Over-fitting the multiple. Picking the multiple that worked best in one backtest often fails on new data.
- ATR has no direction. It measures range, not trend; a high ATR says the stock moves a lot, not which way. For volatility measures from options, see historical vs implied volatility.
In Clear Tape
In Clear Tape's trading systems, a custom system's stop can be set as an ATR multiple below entry, with the ATR length of your choice, and entry or exit conditions can use ATR. ATR is computed Wilder's way on split-adjusted daily bars. Several preset systems use it: the 20-Day Breakout places its stop at entry − 2 × ATR(20) and does not move it; the Leader Trend Filter uses an ATR trailing stop of the 22-day high − 3 × ATR(22) that only moves up; the Trend Pullback (21 EMA) uses ATR(14) to check the stop distance. Stops are checked against each day's low, and if a day opens below the stop, the exit is at the open. Watchlist screening and backtests, which let you compare stop multiples on past prices, are available to Tools and Pro members.
For educational purposes only. Not investment advice.