What Is the ATR Indicator? How to Set a Stop-Loss With ATR
ATR doesn't show where the price will go, but it honestly tells you how far it usually moves. That's why traders love it for setting stop-losses. Here's how to use it.
What it is
ATR (average true range) is an indicator created by J. Welles Wilder that shows the average candle range over recent periods, usually 14. If bitcoin's daily ATR is $2,000, the price travels about $2,000 from low to high on an average day.
ATR measures volatility, not direction: it rises during both sharp rallies and sharp drops.
Setting a stop-loss with ATR
To keep normal noise from hitting your stop, it's placed 1.5–2 ATR away from the entry.
| Parameter | Example |
|---|---|
| Entry | $100 |
| ATR | $4 |
| Stop (2 ATR) | 100 − 8 = $92 |
| Risk per trade | 1% of $10,000 = $100 |
| Position size | 100 / 8 = 12.5 coins |
This way the stop adapts to the market: on calm days it's closer, on volatile days it's farther away, and the position size shrinks. The formula is in the article how to calculate position size, and it's easy to work out with the position size calculator.
Where else it's useful
- A trailing stop set a few ATR away from the price.
- Realistic targets: if the daily ATR is $4, expecting $20 in a day is odd.
- Comparing assets by how "jumpy" they are.
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- ATR shows the average price range, not direction.
- Stops are often placed 1.5–2 ATR from the entry.
- The higher the ATR, the smaller the position for the same risk.
Frequently Asked Questions
What ATR period should I use?
The standard is 14. It works on any timeframe. What matters is calculating ATR on the same chart you trade on.
Is ATR in dollars or in percent?
Usually in price units. To compare different assets, divide ATR by the price to get a percentage.
Can I set a stop tighter than 1 ATR?
You can, but then normal price swings will hit it more often. This decision should be part of your system, not an accident.
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