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Whale Trading

ATR: Using Average True Range for Stops and Position Sizing

In this article we focus on ATR (Average True Range).

At first glance, ATR can look like just:

  • “another number on the chart”, or
  • a rough gauge of “high vs low volatility”.

With a slightly different perspective, ATR becomes:

“the typical amount a market tends to move
per bar on this timeframe”,
expressed as a single number.

With that view, ATR helps you decide:

  • how wide or tight your stop should be, and
  • how large your position should be for a given account risk.

The diagram below compares:

  • Top: price for two markets with different volatility, and
  • Bottom: position sizes under the same account risk
    when using ATR-multiple stops.

The key takeaway is simple:

Even with the same 1% account risk,
position size should be smaller in high-volatility markets
and larger in low-volatility markets.

ATR gives you a way to compute that instead of guessing.

1. What Is ATR? – Average True Range

ATR stands for Average True Range.

“True Range” typically measures:

  • not only the high–low range of the current bar, but also
  • any gap from the previous close,

to answer:

“How far did price actually travel during this bar?”

Then:

  • ATR is simply the average of True Range
    over a certain lookback (e.g. 14 or 20 bars).

So ATR tells you:

  • on this market and timeframe,
    a typical bar tends to move about this much.

2. Treating ATR as a “Volatility Unit”

ATR becomes much more useful when you think of it
as a unit of volatility, not just a raw price number.

Example:

  • BTC 4h ATR = 400 USD,
  • ETH 4h ATR = 20 USD.

Then “1 ATR” means:

  • BTC: a typical 4h bar swings about 400 USD,
  • ETH: a typical 4h bar swings about 20 USD.

From there, you can reason in terms like:

  • “A stop of ~2 ATR tends to survive normal noise
    on this timeframe.”
  • “If I set a stop wider than 3 ATR,
    my account risk may become too large,
    so I should reduce position size.”

In other words, ATR helps you express stops and risk
in volatility units rather than arbitrary ticks or dollars.

3. ATR-Based Stops: Surviving Noise

As we discussed in
risk-management,
a stop is not only a loss limiter; it is also:

“The minimum distance that lets the trade
survive typical noise.”

ATR helps you quantify that “typical noise”.

3-1. Basic idea: X ATR from entry

A common approach is:

  • Long:
    • place the stop 1.5–3 ATR below the entry.
  • Short:
    • place the stop 1.5–3 ATR above the entry.

Example:

  • BTC 4h ATR = 400 USD,
  • Long entry = 50,000,
  • Stop = 50,000 − 2 × 400 = 49,200.

This means:

  • you allow price to move about 2 times its typical 4h fluctuation
    before declaring the trade wrong.

3-2. Swing vs intraday: adjusting the multiple

  • Swing trading (4h / daily):
    • 2–3 ATR stops are common,
    • because you’re aiming at larger swings and want to give trades room.
  • Intraday / scalping (1–15 min):
    • often 1–2 ATR stops,
    • with more active management and more frequent re-entries.

There is no universal “correct multiple”;
what matters is consistency with your strategy
and your rules in
risk-management.

4. ATR and Position Sizing: Same Risk, Different Size

Once you have an ATR-based stop,
the next step is position sizing.

As in risk-management:

  1. Decide the risk per trade as a percentage of equity.

    • e.g. 1% or 0.5%.

  2. Compute the entry–stop distance in price terms.

    • e.g. 2 ATR.

  3. Position size = (allowed loss) ÷ (stop distance).

This automatically controls for volatility:

  • High-volatility market:
    • ATR is large → stop distance is wide →
      position size becomes smaller.
  • Low-volatility market:
    • ATR is small → stop distance is narrow →
      position size becomes larger.

So in practice:

“Higher volatility → smaller size,
lower volatility → larger size”

is implemented with simple arithmetic rather than intuition.

5. Reading ATR Across Timeframes, Assets, and Regimes

ATR numbers can be misleading in isolation.
It helps to consider three dimensions:

  1. Timeframe

    • 1-minute ATR, 1-hour ATR, and daily ATR
      live on completely different scales.
    • As in timeframes,
      focus on the timeframe where you
      actually make decisions.

  2. Asset characteristics

    • Some coins are naturally very volatile,
    • others structurally quieter.
    • When comparing across assets,
      it can be more useful to look at:
      • ATR / price (relative volatility), and
      • whether ATR is high/low relative to its own history.

  3. Market regime

    • In a long range, a sudden rise in ATR
      may signal the start of a new trending phase.
    • After an extended trend, a gradual fall in ATR
      can hint at energy fading and a transition to consolidation.

6. Combining ATR with Other Tools

ATR rarely stands alone as a buy/sell signal.
It shines when combined with other tools.

Useful combinations:

  1. Trend indicators (MA, MACD, ADX, etc.)
    → trend

    • Determine whether the market is trending or ranging,
      then let ATR set a reasonable stop distance within that context.

  2. Oscillators (RSI, Stoch, etc.)
    → oscillators

    • Combine swing position (overbought/oversold)
      with current volatility level from ATR.

  3. Volatility bands (Bollinger Bands, etc.)
    → bollinger-bands

    • Use bands to read squeezes and expansions,
    • use ATR to translate that into concrete stops and size.

  4. Risk management rules
    → risk-management

    • ATR is a tool for stop and size calculation,
      not a replacement for overall risk limits.

7. Practical ATR Checklist

When you see an ATR-based setup,
run through a short checklist:

  1. Which timeframe is this ATR on?

    • Does it match the timeframe you actually trade?

  2. Is ATR high or low relative to recent history?

    • Are we in a wild or quiet environment?

  3. How many ATR is your stop?

    • Too tight (< 1 ATR) and you may get shaken out.
    • Too wide and you may overstretch account risk.

  4. Is position size consistent with your risk rules?

    • Across assets and volatility regimes?

  5. Are you combining ATR with other context?

    • Trend vs range, support/resistance, swing structure, volume, etc.

In the next article,
adr, we will:

  • use ADR (Average Daily Range) to estimate
    how much daily movement is “normal” for a market, and
  • build daily targets, stops, and loss limits
    for short-term trades around that.

Within that broader framework, ATR is best viewed as:

“a ruler for volatility per bar” –
a way to turn noisy price movement into usable numbers
for stops and position sizing.