ATR Stops (14)

Why ATR Stops Matter

Fixed-distance stops ignore regime changes. In quiet regimes, they are too wide (wasting RR); in volatile regimes, they are too tight (death by a thousand cuts). ATR (Average True Range) measures recent volatility, letting your stop 'breathe' when the market expands and tighten when it compresses.

Core Definitions

• ATR(14): 14-period average of true range (max of high-low, |high-prevClose|, |low-prevClose|).
• Stop Multiplier k: Volatility buffer factor; typical k ∈ [1.0, 2.5].
• Structure Stop: A stop placed beyond a swing high/low or key level.

Formulas

Long stop = Entry - k × ATR(14) • Short stop = Entry + k × ATR(14)

Choose k by regime: trending and noisy → higher k; tight ranges → lower k. Always compare to a structure stop and use the more protective of the two.

Position Sizing with ATR

1. Define account risk per trade, e.g. 1.5% of equity.
2. Compute stop distance: d = k × ATR (or use structure if larger).
3. Position size: size = (risk amount) ÷ d.

Example: Equity $2,000; 1.5% risk ⇒ $30. ATR=0.05; k=1.6 ⇒ d=$0.08. Size ≈ $30 / $0.08 = 375 units.