What Is ATR (Average True Range)? How to Use It for Stop-Loss Placement

ATR (Average True Range), also developed by J. Welles Wilder, measures how volatile a stock is. It says nothing about direction — it only answers the question "how much does this stock typically move on an average day?"

How Is ATR Calculated?

The calculation has two steps:

1. True Range — for each candle, take the largest of these three values:

TR = max(
  Today's High - Today's Low,
  |Today's High - Yesterday's Close|,
  |Today's Low - Yesterday's Close|
)

This formula accounts for overnight gaps too — looking only at the day's high-low range can miss a jump relative to the prior close.

2. ATR is the average of these True Range values over a set period (typically 14).

Numeric example: If a stock's 14-day ATR is 5 TL, that means under normal conditions the stock moves an average of 5 TL per day.

ATR's Most Practical Use: Setting a Stop-Loss

ATR's most common and valuable application is setting a volatility-adjusted stop-loss. Instead of using a fixed percentage (e.g. "always stop 5% below"), an ATR multiplier is used:

Stop-Loss = Entry Price - (ATR × Multiplier)

Example: You enter a stock at 100 TL, ATR is 4 TL, and you choose a multiplier of 1.5:

Stop-Loss = 100 - (4 × 1.5) = 100 - 6 = 94 TL

The advantage: on a volatile stock, the stop is automatically placed wider (avoiding premature triggers from normal noise); on a calm stock, it's placed tighter (avoiding unnecessarily wide risk).

Using ATR for Position Sizing

ATR isn't just for stop-losses — it's also used to determine how large a position to open. The goal is to risk a fixed percentage of the portfolio (e.g. 1%) on every trade:

Position Size = (Portfolio × Risk %) / (ATR × Multiplier)

This automatically results in smaller positions on volatile stocks and larger positions on calmer ones, equalizing the real risk carried by every trade.

A BIST-Specific Note: Daily Price Limits

BIST's daily price-move limits can make ATR appear more "compressed" during certain periods compared to markets without such limits — because price simply can't move as much as the underlying volatility would otherwise allow. This can cause ATR to understate real volatility, especially around sharp news events.

Combining ATR With Other Indicators

• ATR + support/resistance: ATR can determine how wide a "reference band" to leave around a support/resistance level — Lumina BIST's Today's Top Picks feature calculates its reference range using exactly this ATR-based logic.
• ATR + Bollinger Bands: Both measure volatility, but in different ways; used together they can help catch rising volatility earlier.
• ATR + trend indicators: Since ATR gives no direction, it should always be paired with a trend/momentum indicator like ADX or MACD.

Conclusion

ATR provides a numeric answer to "how volatile is this stock" and is one of the core building blocks of risk management. It doesn't indicate direction, but it's indispensable for setting a sensible stop-loss and position size. On Lumina BIST you can track ATR alongside 13 other indicators on a single screen, and see the ATR-based reference ranges directly in the daily top-picks list.