RiskPicksThe problem with arbitrary stops
Setting a stop loss at a round number or a fixed dollar amount is one of the most common mistakes traders make. A $1 stop on a stock that moves $3 per day will get triggered by normal noise. A $1 stop on a stock that moves $0.30 per day is leaving money on the table.
Your stop loss should be calibrated to the stock's actual volatility, and that's exactly what ATR does.
What is ATR?
The Average True Range (ATR) measures a stock's average price movement over a period, typically 14 days. It accounts for gaps, wicks, and intraday swings, giving you a single number that represents "how much this stock typically moves."
A stock with an ATR of $2.50 moves about $2.50 per day on average. A stock with an ATR of $0.40 is much calmer.
Using ATR for stop losses
The standard approach is to place your stop loss 1x to 2x ATR away from your entry price:
- 1x ATR: tighter stop, higher chance of getting stopped out, but smaller loss per trade
- 1.5x ATR: a balanced middle ground used by many swing traders
- 2x ATR: wider stop, gives the trade more room to breathe, but requires smaller position size to maintain the same risk
Example
Stock price: $85.00, ATR(14): $3.20
| ATR Multiple | Stop Price (Long) | Stop Distance |
|---|---|---|
| 1x ATR | $81.80 | $3.20 |
| 1.5x ATR | $80.20 | $4.80 |
| 2x ATR | $78.60 | $6.40 |
Notice how the wider stop automatically reduces your position size (since risk = shares × stop distance). This is the self-balancing mechanism that keeps your account safe.
ATR for take profit targets
ATR also works for setting profit targets. A common approach: set your take profit at 2x ATR from entry, giving you a built-in 2:1 risk-reward ratio when using a 1x ATR stop.
When ATR stops don't work
ATR is backward-looking. It tells you what a stock has done, not what it will do. Before earnings, FDA decisions, or other binary events, realized volatility often explodes past the ATR range. In these situations, either widen your stop significantly or avoid the trade entirely.
Key takeaway
Your stop loss should be a function of volatility, not an arbitrary number. ATR gives you that function. Use it to set stops that are wide enough to survive normal fluctuations but tight enough to protect your capital when the trade is genuinely wrong.