A 10 tick stop on ES means very different things on a quiet day and a fast one. On the quiet day it may sit outside the normal back-and-forth. On the fast one, ordinary noise can hit it. Average True Range (ATR) puts a number on recent bar range so your stop and your size can scale with it, instead of staying fixed.
How ATR Is Calculated
J. Welles Wilder introduced ATR in his 1978 book New Concepts in Technical Trading Systems. For each bar, the True Range is the largest of three values: the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. The last two capture gaps.
ATR is a smoothed average of True Range. Wilder's smoothing for a 14 period setting is: ATR today = (ATR yesterday x 13 + True Range today) / 14. Many platforms offer 14 as the default, and some let you choose simple or exponential smoothing. ATR doesn't indicate direction. It measures how far bars have been moving.
Which Chart and Session
Your next step
Check the math before you size up.
Use your recorded win rate, average win and loss, and trading costs in the free edge calculator. Estimates are a starting point, not proof of an edge.
ATR depends on the timeframe and session. A 5-minute ATR describes 5-minute bar range, a daily ATR describes whole days, and an ATR on a full-session chart includes overnight bars while an RTH-only chart does not. Pick the chart you actually trade, and don't compare readings from different setups. The right reading also depends on price level and regime, so there's no universal number for ES. Read your own chart over several weeks to see its normal range.
ATR-Based Stops
The idea is to set the stop at a multiple of ATR from entry, so the stop widens when bars get bigger and narrows when they shrink. A simple version is 1x ATR. Some traders set a floor (say 0.5x) below which the stop is probably inside the noise, and a ceiling (say 1.5x) above which the risk is too high, then skip the trade if the setup needs more. Those multiples are starting points to test, not proven values. Compare a few multiples in SIM or replay over many trades, and include commissions and slippage, before you choose one.
ATR Position Sizing
Contracts = dollar risk per trade / (stop in points x dollar value per point)
A hypothetical example, using a 5-minute ATR of 3.0 points and a 1x ATR stop:
| Item | ES | MES |
|---|---|---|
| Account and risk (1 percent) | $50,000, $500 | $50,000, $500 |
| Stop (1x ATR) | 3.0 points, 12 ticks | 3.0 points, 12 ticks |
| Risk per contract | 3.0 x $50 = $150 | 3.0 x $5 = $15 |
| Contracts | $500 / $150 = 3.33, round down to 3 | $500 / $15 = 33.3, round down to 33 |
| Planned risk | $450 | $495 |
For NQ at $20 per point, a hypothetical 5-minute ATR of 12 points gives a 12 point stop, which is $240 per contract. $500 / $240 is 2.08, so 2 contracts, or $480 of planned risk. These are the planned figures. Slippage, fees and a stop that fills beyond its price all make the real loss larger.
The result is that when ATR doubles, the contract count roughly halves for the same dollar risk. That keeps planned risk steady, but a wider stop also means a trade needs a farther target to keep the same reward to risk ratio, and some setups won't fit.
Reading Volatility Changes
You can compare today's ATR to its own recent average, for example by plotting a 20 period average of the ATR. Above the average means ranges are widening, and below means they're narrowing. That's a statement about bar size. It doesn't tell you whether price will trend, range or reverse, and it shouldn't be used alone to pick a strategy. If you use it to switch strategies, define the rule in advance and test it with out-of-sample days.
On days when ATR is far above its recent average, such as around scheduled releases, many traders cut size or stay out. Stops can slip badly in those markets, so the planned risk figure is less reliable. Models and levels, including KPL, don't change that, since the KPL are fixed reference prices anchored to the regular session open and are separate from volatility measures. See the KPL trading page.
Setting It Up in NinjaTrader
NinjaTrader 8 includes an ATR indicator. Add it to your execution chart, set the period (14 is the default), and display the value in a separate panel. In the Market Analyzer you can add an ATR column for each instrument to compare conditions across markets. Keep the settings the same across tests, and check the NinjaTrader 8 help guide for the current indicator options.
Before you use ATR sizing live, run it on SIM and replay for a few weeks and record planned risk against actual loss per trade. That comparison shows how much slippage and fees are adding. The edge calculator can help you see how those costs affect expectancy.
About the Author
Founder, Young Money Investments · Quant Trader
Cameron trades ES, NQ, and futures across multiple market cycles. He founded Young Money Investments to teach systematic, data-driven trading and manages Magnum Opus Capital. His work emphasizes documented rules, risk controls, and review over outcome promises.
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