Quick Answer: ATR (Average True Range) helps traders set stop loss and target levels based on market volatility instead of guesswork. By using ATR multiples, you adjust your risk to current market conditions, avoid premature stop-outs, and improve reward-to-risk ratios.
Why This Matters for Indian Traders
In the fast-moving NSE & BSE markets, using fixed stop losses can get you stopped out even if your trade direction is correct. ATR solves this by adapting stops and targets to volatility. Whether you're trading Nifty 50 futures, Reliance shares, or Bank Nifty options, ATR ensures your risk management matches real market conditions.
What is ATR?
ATR, or Average True Range, is a volatility indicator developed by J. Welles Wilder. It doesn’t tell you the direction of the market — only how much price typically moves in a given period.
Formula:
- True Range (TR) = max[(High - Low), |High - Previous Close|, |Low - Previous Close|]
- ATR = (Sum of TR over n periods) ÷ n
In most charting tools like TradingView or Zerodha Kite, you can simply add the ATR indicator and choose a period (commonly 14).
How to Use ATR for Stop Loss Calculation
Step-by-Step:
- Find the current ATR value for your stock/index.
- Decide your multiple — common values: 1.5x ATR or 2x ATR.
- For a long trade: Stop Loss = Entry Price – (ATR × Multiple).
- For a short trade: Stop Loss = Entry Price + (ATR × Multiple).
Example (Indian Market):
If Reliance is at ₹2,500 and ATR(14) = ₹22:
- Using 2× ATR: Stop Loss = ₹2,500 – (₹22 × 2) = ₹2,456.
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Join Now for ₹499Using ATR for Target Setting
Targets should also reflect volatility. A common approach is to set targets at a multiple of your stop loss distance.
Formula:
Target = Entry Price ± (ATR × Multiple × Reward-to-Risk Ratio)
Example:
If stop loss is 2× ATR and you aim for a 2:1 reward-to-risk ratio:
- Target = Entry Price + (ATR × 2 × 2) for longs.
Key Benefits of ATR-Based Stops & Targets
- Adapts to market volatility.
- Prevents premature stop-outs.
- Improves consistency in trading results.
- Works across stocks, commodities, and indices.
Common Mistakes to Avoid
- Using ATR without considering position size.
- Mixing ATR-based stops with fixed-rupee targets.
- Ignoring news events that can spike volatility.
Pro Tips
- Combine ATR with Position Size Calculator for precise risk per trade. [Link to Position Size Calculator]
- Backtest your ATR settings on historical data.
- Adjust ATR multiples for different asset classes.
FAQs
1. What is the best ATR setting for intraday trading?
ATR(14) on a 5-minute or 15-minute chart is popular among intraday traders.
2. Is ATR good for options trading?
Yes, but remember options have time decay; combine ATR with option greeks.
3. Can ATR predict market direction?
No, ATR measures volatility, not trend direction.
4. How do I use ATR for trailing stops?
Adjust your stop loss level by ATR multiples as price moves in your favor.
5. Should beginners use ATR?
Absolutely, it’s one of the most beginner-friendly volatility tools.
6. What’s a safe ATR multiple?
1.5× to 2× ATR is common for most instruments.
7. Where can I learn more?
In our ₹499 Trading Course, we cover ATR with live examples.
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