Volatility-Based Position Sizing with ATR

What Is ATR and Why Use It for Sizing?

Average True Range (ATR) measures how much price typically moves over a period. Higher ATR means higher recent volatility; lower ATR means quieter markets. Using ATR for position sizing aligns your trade size with current conditions: you take smaller positions when markets are choppy and larger positions when markets are calm, while keeping your dollar risk consistent.

If you need a quick refresher on ATR itself, see our primer: Average True Range (ATR) Simply Explained.

Core Workflow: From Stop Distance to Position Size

Volatility-based sizing begins with your planned risk per trade and a stop-loss that reflects current volatility. ATR helps you place a stop far enough to avoid ordinary noise while defining how much you stand to lose if the trade fails.

Simple step-by-step example

• Decide your risk per trade. Example: on a $10,000 account, risk 1% = $100.
• Check ATR. Example: price is $50 and ATR(14) is $1.20.
• Set a volatility-aware stop. For instance, 1.5 × ATR below entry: about $1.80 beneath $50, so a stop near $48.20.
• Find position size by matching risk to stop distance. With $100 risk and $1.80 distance, you can buy about 55 shares ($100 ÷ $1.80 ≈ 55).

This approach keeps your maximum loss near $100 whether the market is quiet or active. When volatility rises and the stop needs to be wider, size naturally shrinks; when volatility falls, size increases.

Choosing the ATR multiple

Many traders start with 1–2 times ATR for stops. Tighter than 1× ATR risks being shaken out by normal swings; much wider than 2× ATR may reduce size so much that the trade becomes inefficient. Pick a starting multiple, then evaluate it across many charts to see what suits your timeframe and strategy.

Settings for Intraday vs. Swing Trading

• Intraday: Shorter ATR periods (e.g., 5–14) on the timeframe you trade (e.g., 1–5 minute or 15 minute charts). Volatility changes fast, so reassess size when conditions shift.
• Swing: Commonly 14–20 period ATR on daily charts. Consider wider stops (e.g., 1.5–2× ATR) to ride multi-day swings and avoid routine pullbacks.
• Fast markets: During news or high volatility, ATR can spike. Expect smaller position sizes and consider pausing if spreads and slippage expand.
• Quiet markets: ATR may compress. Ensure stops are not so tight that normal intraday noise hits them repeatedly.

Keep your risk budget consistent across trades. ATR adjusts your stop distance and position size, but your dollar risk stays the same.

Common Pitfalls and How to Practice

• Ignoring slippage and gaps: Real fills can differ from planned stops. Leave a margin in your risk plan.
• Overfitting ATR settings: One perfect multiple on one symbol may fail elsewhere. Test across different markets and conditions.
• Not updating size: If entry price changes, recalc the distance to your stop and adjust size before placing the order.
• Mixing entry logic with risk logic: Define the setup first; use ATR only to set stop distance and size.
• Forgetting costs: Commissions and spreads matter more when sizes change frequently.

Practice makes sizing intuitive. Rehearse the steps: define risk, set an ATR-based stop, compute size, then review outcomes over many samples. ChartingPark lets you do this quickly on accelerated historical charts powered by TradingView, so you can iterate, track results, and refine your settings.

Ready to turn concepts into reps? Practice volatility-based position sizing with ATR inside the simulator: https://app.chartingpark.com.