Ask ten traders where to place a stop-loss, and you’ll get ten different answers. Some swear by fixed-point stops, others use percentage-based levels, and then there are those who simply ‘feel’ where the market might turn. But traders looking for a more structured approach often turn to the Average True Range (ATR)—a volatility-based indicator that adapts to market conditions.
ATR stops can be a great tool for trade management, but they’re not perfect. Let’s break down when they work—and when they don’t.
Why Use ATR for Stop-Loss Placement?
ATR measures the average volatility of a market over a set period, usually 14 days. Instead of setting a static stop-loss, traders use a multiple of the ATR to position their exit level. The logic is simple: a more volatile market needs a wider stop, while a quiet market can afford a tighter one.
For example, if the ATR on GBP/USD is 50 pips and you’re using a 2x ATR stop, your stop-loss would be 100 pips away from your entry. In contrast, if volatility drops and ATR shrinks to 30 pips, your stop would adjust to 60 pips.
This approach helps traders avoid getting stopped out by normal market noise while still maintaining a structured risk framework.
EUR/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
When ATR Stops Work Well
Adapting to Market Conditions
Markets aren’t static. Volatility expands and contracts, and ATR-based stops naturally adjust to these shifts. This makes them particularly useful in trending conditions, where price swings can widen over time.
Avoiding Arbitrary Stop Placement
Instead of guessing where a stop ‘feels right,’ ATR provides an objective framework based on real price movement. This helps remove emotional bias from trade management.
Reducing the Impact of Spikes and Noise
Many traders place stops just below recent lows or above recent highs—prime hunting grounds for liquidity grabs. ATR stops, positioned at a calculated distance, can help avoid these shakeouts.
When ATR Stops Can Fail You
Low Volatility = Tight Stops = Premature Exits
ATR stops rely on recent price action. In quiet markets, ATR contracts, leading to tighter stop placement. This can be problematic when volatility suddenly picks up, as small price swings can take traders out of otherwise good trades.
Doesn’t Consider Market Structure
ATR is purely mathematical—it doesn’t care about support, resistance, or key technical levels. Traders who use ATR stops in isolation may find themselves stopped out just before price respects a critical level.
Choppy Markets Can Whipsaw ATR Stops
In sideways, erratic markets, ATR stops can lead to unnecessary exits. If a market is ranging tightly and ATR is small, stops may be placed too close to entry, leading to multiple stop-outs in quick succession.
One Rule That Can’t Be Broken: Never Widen Your Stop
One of the biggest mistakes traders make—whether using ATR stops or any other method—is moving a stop-loss further away once it’s placed. This usually happens when a trade starts going against them, and instead of accepting the loss, they ‘give it more room to breathe.’
The problem? This completely undermines risk management. A stop-loss should be a pre-determined level that, if hit, signals the trade idea was wrong. Widening it turns a small, manageable loss into a much bigger one—sometimes even wiping out weeks of gains.
If a trade isn’t working and your stop is at risk of being hit, accept it, take the loss, and move on. Adjusting stops should only ever mean tightening them to lock in profits—not loosening them to avoid taking a hit.
How to Improve ATR-Based Stops
ATR stops work best when combined with other trade management techniques:
Use ATR in Conjunction with Market Structure
Rather than blindly placing a stop at 2x ATR, check if your stop aligns with key support or resistance levels. If ATR suggests a stop that sits just below a major level, consider widening it slightly to avoid getting shaken out.
Adjust for Volatility Cycles
If ATR is unusually low due to a period of calm, consider using a longer lookback period (e.g., 21-day ATR) to get a broader view of market volatility.
Pair ATR with a Trailing Stop Strategy
ATR-based trailing stops allow traders to lock in profits as a trend develops while still giving the trade room to breathe. Instead of setting a fixed stop, you can trail a stop at 1.5x ATR below the most recent high in an uptrend.
Final Thoughts
ATR stops provide a structured, volatility-adjusted approach to risk management, helping traders avoid common pitfalls like placing stops too tight in high-volatility markets or too wide in quiet conditions. But like any tool, they’re not foolproof. Used in isolation, ATR can lead to premature exits or misplaced stops.
The best approach? Use ATR as a guideline, not a hard rule. Combine it with market structure, trend analysis, and an understanding of volatility cycles to refine your stop placement. After all, trading is about staying in the game long enough to capitalise on the big moves—without getting chopped up in the noise.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
ATR stops can be a great tool for trade management, but they’re not perfect. Let’s break down when they work—and when they don’t.
Why Use ATR for Stop-Loss Placement?
ATR measures the average volatility of a market over a set period, usually 14 days. Instead of setting a static stop-loss, traders use a multiple of the ATR to position their exit level. The logic is simple: a more volatile market needs a wider stop, while a quiet market can afford a tighter one.
For example, if the ATR on GBP/USD is 50 pips and you’re using a 2x ATR stop, your stop-loss would be 100 pips away from your entry. In contrast, if volatility drops and ATR shrinks to 30 pips, your stop would adjust to 60 pips.
This approach helps traders avoid getting stopped out by normal market noise while still maintaining a structured risk framework.
EUR/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
When ATR Stops Work Well
Adapting to Market Conditions
Markets aren’t static. Volatility expands and contracts, and ATR-based stops naturally adjust to these shifts. This makes them particularly useful in trending conditions, where price swings can widen over time.
Avoiding Arbitrary Stop Placement
Instead of guessing where a stop ‘feels right,’ ATR provides an objective framework based on real price movement. This helps remove emotional bias from trade management.
Reducing the Impact of Spikes and Noise
Many traders place stops just below recent lows or above recent highs—prime hunting grounds for liquidity grabs. ATR stops, positioned at a calculated distance, can help avoid these shakeouts.
When ATR Stops Can Fail You
Low Volatility = Tight Stops = Premature Exits
ATR stops rely on recent price action. In quiet markets, ATR contracts, leading to tighter stop placement. This can be problematic when volatility suddenly picks up, as small price swings can take traders out of otherwise good trades.
Doesn’t Consider Market Structure
ATR is purely mathematical—it doesn’t care about support, resistance, or key technical levels. Traders who use ATR stops in isolation may find themselves stopped out just before price respects a critical level.
Choppy Markets Can Whipsaw ATR Stops
In sideways, erratic markets, ATR stops can lead to unnecessary exits. If a market is ranging tightly and ATR is small, stops may be placed too close to entry, leading to multiple stop-outs in quick succession.
One Rule That Can’t Be Broken: Never Widen Your Stop
One of the biggest mistakes traders make—whether using ATR stops or any other method—is moving a stop-loss further away once it’s placed. This usually happens when a trade starts going against them, and instead of accepting the loss, they ‘give it more room to breathe.’
The problem? This completely undermines risk management. A stop-loss should be a pre-determined level that, if hit, signals the trade idea was wrong. Widening it turns a small, manageable loss into a much bigger one—sometimes even wiping out weeks of gains.
If a trade isn’t working and your stop is at risk of being hit, accept it, take the loss, and move on. Adjusting stops should only ever mean tightening them to lock in profits—not loosening them to avoid taking a hit.
How to Improve ATR-Based Stops
ATR stops work best when combined with other trade management techniques:
Use ATR in Conjunction with Market Structure
Rather than blindly placing a stop at 2x ATR, check if your stop aligns with key support or resistance levels. If ATR suggests a stop that sits just below a major level, consider widening it slightly to avoid getting shaken out.
Adjust for Volatility Cycles
If ATR is unusually low due to a period of calm, consider using a longer lookback period (e.g., 21-day ATR) to get a broader view of market volatility.
Pair ATR with a Trailing Stop Strategy
ATR-based trailing stops allow traders to lock in profits as a trend develops while still giving the trade room to breathe. Instead of setting a fixed stop, you can trail a stop at 1.5x ATR below the most recent high in an uptrend.
Final Thoughts
ATR stops provide a structured, volatility-adjusted approach to risk management, helping traders avoid common pitfalls like placing stops too tight in high-volatility markets or too wide in quiet conditions. But like any tool, they’re not foolproof. Used in isolation, ATR can lead to premature exits or misplaced stops.
The best approach? Use ATR as a guideline, not a hard rule. Combine it with market structure, trend analysis, and an understanding of volatility cycles to refine your stop placement. After all, trading is about staying in the game long enough to capitalise on the big moves—without getting chopped up in the noise.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.