Risk Management

Adjusting Risk for Volatility Using ATR

ATR lets you scale stop-loss and position size to the instrument's actual volatility, not a fixed distance.

Key rules

  1. ATR = average true range over 14 periods (default)
  2. Place stops at 1–2× ATR beyond the entry to avoid noise
  3. Higher ATR requires wider stops AND smaller position size
  4. Dollar risk stays constant; position size varies with ATR
  5. ATR expands during trends and contracts during consolidations

Average True Range (ATR) measures the average price range per candle over a given period (typically 14). Using 1–2× ATR for stop placement keeps stops outside normal price noise.

In volatile conditions (high ATR), stops need to be wider — but position size should decrease proportionally to keep dollar risk constant.

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