Indicators in Practice & Backtesting· Lesson 5 of 7· 6 min

Position Sizing and ATR Stops

Even the best signals lose sometimes. Deciding how much to lose per trade matters more than finding the perfect signal.

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Text version · Indicators in Practice & Backtesting, lesson 5: “Position Sizing and ATR Stops”

Even the best signals lose sometimes. Deciding how much to lose per trade matters more than finding the perfect signal.

Decide how much you can lose, then how much to buy

First set your risk per trade (for example, 1% of the account), then work out the share count as "affordable loss ÷ stop distance per share." That's position sizing.

Volatility up, position automatically down

Set the stop as a multiple of ATR: the jumpier the market, the farther the stop, and the same risk budget buys fewer shares.

Fixed shares vs. fixed risk

Buying the same number of shares every time means one loss in a wild market can be several times a normal one; working the share count back from a fixed risk keeps the maximum loss per trade the same, and the maximum drawdown more under control.

Key takeaways

Set your risk per trade first (e.g. 1% of the account), then size the position from the stop distance.
Position size = affordable loss ÷ stop distance per share.
Set stops with ATR: when volatility rises, the stop moves further away and the position shrinks automatically, keeping the risk on each trade the same.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

Click "Example": $10,000, 1% risk per trade, ATR $1 × 2 = $2 stop. What's the most shares you can buy?
Click "Double the volatility": what do the stop distance and share count become? Did the risk amount change?
Set the ATR multiplier to 1× (a closer stop): you get more shares, but the stop is also easier for normal swings to hit.
Look at the 20 trades: during the wild stretch, how much does the fixed-shares method risk per trade? Click "New sequence" a few times.

Quiz and explanations

1. Your account is $10,000, you'll lose at most 1% per trade, and your stop is $2 per share away. What's the most shares you can buy?: Answer: 50 shares.$100 ÷ $2 = 50 shares.
2. Volatility rises (ATR doubles). To keep the risk per trade the same, your position should…: Answer: Halve.The stop distance doubles, so the position halves.
3. Your account is $20,000, risk per trade is 1%, ATR = $1.5, and your stop is 2 × ATR. What's the most shares you can buy?: Answer: About 66 shares.Affordable loss $200, stop distance $3, and $200 ÷ $3 ≈ 66 shares.

Terms in this lesson

ATR (Average True Range): Average true range: the average size of each candle's move, regardless of direction.
maximum drawdown (Max Drawdown): The biggest drop from an equity peak to the lowest point that follows.
position sizing (Position Sizing): Deciding how much to buy on each trade based on how much risk you can take.
risk per trade (Risk per Trade): How much you're willing to lose if a trade hits its stop-loss, usually 0.5%–2% of the account.
stop-loss (Stop Loss): Automatically closes a position when price moves against you to a preset level, capping your maximum loss.