1
True range
Captures the bar range and gaps from the prior close.
Lesson · Trading Risk Management
Volatility and ATR-Based Risk
Use recent price range and Average True Range to adapt stop distance and position size when market volatility changes.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
2
ATR
An average of recent true ranges — a simple average in this lab, Wilder’s smoothing on most platforms — and not a directional indicator.
3
Volatility sizing
A larger stop distance requires fewer units for the same planned account risk.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Volatility and ATR-Based Risk Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Identify the market regime
Compare current range with the recent baseline.
Separate direction from volatility
Large bars can occur in bullish, bearish, or balanced markets.
Adapt quantity
Keep account risk stable while the price distance changes.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. What does ATR measure?
ATR estimates recent price movement magnitude without predicting direction.
2. ATR doubles while account risk stays fixed. Position size should generally:
A wider risk distance requires fewer units to keep dollars at risk stable.
3. High ATR means the market is:
Volatility describes movement size, not direction.
4. ATR is 1.50, the stop is placed at 2 × ATR and the dollar risk is $600. Stop distance and size?
Distance = 2 × 1.50 = 3.00. Size = $600 ÷ $3.00 = 200 shares. If ATR rises to 3.00 the same $600 buys 100 shares at a 6.00 distance.
Practical rules
- Compare ATR on the same instrument and timeframe.
- Use structure first and volatility as a sizing input.
- Recalculate size after a volatility regime change.
Common mistakes
- Using ATR as a directional signal.
- Keeping fixed share size in every volatility regime.
- Placing the stop exactly one ATR away without structural context.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
CME Group · Position and Risk Management
Risk tolerance and predefined exit levels should guide exposure.