How to use ATR for trailing stop loss?

 In an earlier post we learnt about a volatility indicator, Average true range and its uses. One of the uses of that indicator that we discussed was to put stop-losses.

In this post we will learn about using ATR to put trailing stop-losses.

Many traders, specially beginners lose their money not because they were wrong about the trend direction or entry point, but their stop-loss was poorly placed. Many traders enter good trades, get stopped out early and then watch price moving in the direction they expected. This gives a feeling of self doubt and frustration and a feeling that big players are hunting their stop-loss.

The real problem, however is not stop hunting but rather a static emotional stop loss placed at wrong place.

In this article, first we would learn about common stop-loss problems beginners face and then introduce ATR as a practical solution for the problems. Finally we will learn how we can use ATR to place trailing stop-loss to manage risk effectively.

What problems beginners face while placing stop-loss?-

Before we learn to use ATR for stop loss, it is important to know what problems beginners face in placing stop loss. Once we stand the problem then only we can understand the solution.

1) Stops placed too tight- Many beginners place their stops too tight, like just below the entry candle, or exactly at the recent low or a fixed 10-20 pips below the entry.

The problem with such stops is, markets fluctuate naturally and can be volatile at times. Tight stops get hit not because the trade idea was wrong but rather there was no breathing space for the trade to flourish.

2) Stops placed randomly or emotionally- Many traders put their stop loss based on amount of money they afford to lose or fear of loss or gut feeling and not on data. While position sizing should be based on risk you are willing to take, the stop-losses should always be placed based on price behaviour and market structure and not on emotions.

3) Trailing stop loss moved too early- This is another common mistake beginners make. This kills a winner trade before it can fetch you a big profit. 

Why ATR is better for stop loss placement-

ATR is a volatility indicator that tells you how much and how fast price moves in a given period. This gives a certain advantage when you use ATR based stop loss which are-

• Stops adapt according to volatility. The ATR based stops become wider when the market is volatile and narrows in periods of lesser volatility.
• ATR based stops are based on data and not on emotions.
• You avoid being stopped out by normal market noise.

How to use ATR for trailing stop loss placement-

Till now we have discussed the problems you face in placing stop loss and why ATR is a possible solution for your problems. Now is the time to get practical and discuss how you should use ATR for stop loss placement.

Here is a step by step guide.

Step 1-Add ATR indicator to your chart- Most of the charting tools these days have ATR calculation built in. All you have to do is click on indicators tab, search for ATR and apply. The  default setting for ATR in most charting software is14 and it works well.

Step 2- Choose a multiplier- Most common multipliers used are 1.5, 2 and 3. A multiplier of 1.5 is used for tighter aggressive  stop loss. Most commonly this is used by short term and swing traders or when there are signs of trend weakening and trader wants to lock in maximum profit from the trade.

2 is some what a balanced multiplier used by medium term traders and a multiplier of 3 is used by longer term traders or someone whos has large risk tolerance.

For beginners 2* ATR is a good starting point.

I would also like to tell you here that these numbers are not something written in stone, you can always test things according to your own trading style and come of with a multiplier that works well for you.

Step 3- Place initial stop loss using ATR- The formula for stop loss is-

Stop loss = Entry price - (ATR * Multiplier)

For example, if you buy a stock at price 1000 and ATR is 20 then your stop loss would be-

Stop loss= 1000 - (20* 2) = 960

Step 4- Trail the stop loss with ATR- This is where ATR shines, as price moves up in your expected direction you can trail your stop loss up based on ATR value. The following formula can be used to recalculate trailing stops.

 Trailing stop loss = Recent high - (ATR * multiplier)

This way , stop loss not only moves up as price moves up but also adjusts according to volatility. Also, it stays far enough to avoid normal pull backs.

Word of caution here, don't trail the stop loss on each candle- trail only when a new high has been made.

Let's understand this with the help of a chart.

Final Thoughts

Using ATR for stop-loss placement removes much of the guesswork and emotion from trade management. Instead of relying on arbitrary levels or fear-based decisions, ATR allows your stop-loss to adapt naturally to market volatility, giving trades the room they need to develop while still controlling risk. By combining a sensible ATR multiplier with disciplined trailing rules, traders—especially beginners—can avoid premature stop-outs, protect profits, and stay aligned with the market’s rhythm. In the long run, mastering ATR-based stop-losses can significantly improve both consistency and confidence in trading.