It’s a popular belief that Average True Range (ATR) is the best way to set stop-losses—and some even go further, saying you must use ATR. While ATR is a valuable tool, the truth is more nuanced: ATR is a helpful option, not a universal rule.

Let’s explore when ATR makes sense, when it doesn’t, and how to use it properly—if at all.

What Does ATR Do?

ATR measures market volatility by calculating the average range between highs and lows over a set number of periods. It gives you:

• A sense of how much price moves on average
• A way to size stops that account for noise
• A volatility-adjusted buffer to avoid being stopped out prematurely

Using 1.5x or 2x the ATR is common for creating stop-losses that can breathe during normal fluctuations.

Why ATR-Based Stops Can Work Well

ATR stops are useful because they:

• Adjust automatically to changing volatility
• Avoid arbitrarily tight stops
• Help with position sizing when paired with consistent risk per trade
• Are easily programmable into algorithms or rule-based systems

They’re particularly effective for trend-following, swing trading, or high-volatility markets.

But You Don’t Have to Use ATR

There are many valid stop placement methods that don’t involve ATR, such as:

• Price structure stops: Below swing lows or above highs
• Time-based stops: Exit after a set time if no movement occurs
• Pattern invalidation: Exit if a breakout or setup fails
• Fixed pip/point stops: Used in very mechanical strategies
• Volatility bands or Kumo boundaries (e.g. Ichimoku)

These methods are often more aligned with discretionary trading, chart patterns, or visual price action.

When ATR-Based Stops Can Be a Problem

Relying on ATR stops may not work well when:

• The market is consolidating or flat (ATR gives false security)
• You’re trading very tight setups (ATR may push the stop too wide)
• You don’t combine it with technical context or structure
• You assume it’s “foolproof” and stop thinking critically

ATR is a guide, not a gospel.

Conclusion: ATR Stops Are Useful—but Not Mandatory

You don’t have to use ATR to set stops. It’s one of several tools available—and can be powerful when used in context. But the best stop-loss method is the one that:

• Fits your strategy
• Respects market structure
• Controls your risk
• Keeps your trading emotionally stable

To learn how to set stops strategically—whether using ATR, structure, or price action—explore our Trading Courses designed to help traders protect capital while staying flexible and in control.