ATR Position Sizing: A Simple, Stress-Lowering Risk Framework

ATR Position Sizing: A Simple, Stress-Lowering Risk Framework

Quick take:
ATR (Average True Range) is a volatility gauge. When you size positions and place stops using ATR, you normalize risk across different symbols and market regimes. That keeps losses consistent and helps avoid oversizing when volatility expands.

What is ATR?
Average True Range measures how much price typically moves over a period. “True range” is the greatest of: today’s high – today’s low, |today’s high – yesterday’s close|, |today’s low – yesterday’s close|. ATR is the moving average (commonly 14 bars) of that true range. Higher ATR = more movement; lower ATR = quieter market.

Why ATR helps position sizing

1. Normalizes risk: the same % risk per trade despite different volatilities.
2. Prevents oversizing in volatile markets.
3. Adapts automatically as volatility contracts or expands.

A simple framework (step-by-step)

1. Pick risk per trade: e.g., 0.5% of account.
2. Choose stop distance as a multiple of ATR: e.g., 1.5 × ATR(14).
3. Convert that ATR distance into dollars.
4. Position size = floor( account\_risk / dollar\_risk\_per\_unit ).

Stock example
• Account: \$25,000. Risk per trade: 0.5% = \$125.
• Stock price: \$50. ATR(14): \$1.20.
• Stop: 1.5 × ATR = \$1.80 below entry.
• Dollar risk per share = \$1.80.
• Position size = floor( \$125 / \$1.80 ) = 69 shares.

Futures example
• Account: \$25,000. Risk per trade: 0.25% = \$62.50.
• ES futures ATR: 9 points. Stop: 1 × ATR = 9 points.
• ES value = \$50/point → risk per contract = 9 × \$50 = \$450 (too large).
• Micro ES (MES) = \$5/point → risk per contract = 9 × \$5 = \$45 (OK).
• You can take 1 MES (or 2 if risk budget allows).

Where to place stops
• Use the chart first (structure), then add an ATR buffer.
• Mean reversion: below the swing low minus \~1 × ATR.
• Breakout: below the breakout level minus \~1 × ATR.
• The goal is a stop that’s technically meaningful and volatility-aware.

Common pitfalls
• Using too short an ATR length (noisy) or too long (unresponsive). 14 is a practical default.
• Mixing points and dollars (especially in futures). Convert ATR to dollar risk before sizing.
• Ignoring slippage and gaps; leave a little budget if your market tends to jump.

Quick checklist

1. Define % risk per trade.
2. Set ATR length (e.g., 14) and stop multiple (e.g., 1.0–2.0).
3. Convert ATR distance to \$ risk.
4. Size = floor( risk\_budget / \$risk\_per\_unit ).
5. Place stop at structure ± ATR buffer.
6. Pre-plan exit and stick to the plan.

Bottom line
ATR-based stops and position sizing keep risk consistent, help you breathe through volatility, and make your results less dependent on which symbol or regime you’re trading.