ATR Stop Distance and Position Sizing
Calculate True Range and ATR from OHLC values, see how a chosen ATR multiple changes stop distance, and connect the result to position size.
By Kru Kook (Krittiya Khunabrimas)
What True Range measures
True Range (TR) accounts for the day’s range and gaps from the previous close. It is the maximum of:
- High − Low
- Absolute value of High − Previous Close
- Absolute value of Low − Previous Close
Average True Range (ATR) is an average or smoothed value of TR over a chosen period. ATR measures movement size; it does not indicate whether price should rise or fall.
Calculate ATR from numerical OHLC values
The table below uses three days and a simple average for illustration:
| Day | High | Low | Previous close | TR |
|---|---|---|---|---|
| 1 | 102 | 98 | 100 | 4 |
| 2 | 105 | 100 | 102 | 5 |
| 3 | 106 | 101 | 104 | 5 |
Day 2 TR is the maximum of 5, 3, and 2, or 5. Day 3 TR is the maximum of 5, 2, and 3, also 5. The simple three-day average is (4 + 5 + 5) ÷ 3 = 4.67 points.
Platforms may use different lookback periods and smoothing methods, such as a simple average or Wilder smoothing. Their ATR values may therefore differ from this simple illustration.
Convert ATR into a stop distance
Some plans test a stop distance equal to a chosen ATR multiple, such as 1.5 × ATR. This is a parameter to evaluate, not a universal rule or a guarantee of suitability. With ATR of 4.67 points, 1.5 times ATR is about 7.0 points.
If a hypothetical Long entry is at 120, that distance would put the stop near 113. The stop should reflect the condition that invalidates the trade idea; do not widen it merely to avoid being stopped out.
Connect stop distance to position size
TFEX lists a THB 200-per-point multiplier for SET50 Futures. A 7-point distance therefore represents about THB 1,400 of gross risk per contract before costs. If the chosen risk budget is THB 5,000, simple division gives 3 contracts and THB 4,200 of gross planned risk. Add costs and test the possibility of a worse exit.
See the fixed-risk position sizing formula for the full calculation.
ATR limitations
- ATR is based on historical data and cannot tell you the next price movement.
- ATR changes with the timeframe and lookback period.
- ATR does not guarantee a stop will execute at its trigger level.
- A wider stop reduces position size when the risk budget stays the same.
Test the ATR definition, multiplier, and stop rule on data not used to tune the system. Include actual costs or reasonable assumptions.