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Volatility stop

A stop placed a multiple of recent volatility away from entry, so the distance adapts to how much the instrument normally moves.

A trailing stop held two ATRs under a rising priceA rising price line with a stepped line below it that climbs whenever price climbs and holds its level whenever price falls, until price drops onto it.PRICE AND A TRAILING ATR STOP2 × ATRstop hittrailing stoppriceIllustrative prices. The stop follows price up and never moves back down.
A trailing stop set by ATR. Average true range measures how far a market typically travels in a session, so a stop placed a multiple of ATR under price leaves room for ordinary swings. The step line only ever ratchets up, and the circle marks where price falls onto it.

A volatility stop asks a better question than a fixed percentage does: how far can this instrument move without meaning anything? Typically the answer is a multiple of atr - 1.5x to 3x is the common band.

Worked: a stock with a 14-day ATR of $1.20 and a 2x multiple gets a $2.40 stop. A stock with a $0.30 ATR gets $0.60. Both are equally far from entry in the only unit that matters, which is normal daily noise. Pair it with atr-position-sizing and the two names carry identical dollar risk despite very different chart appearances.

Two cautions. ATR is backward-looking, so a stop set in a calm week is too tight for the volatile week that follows - which is precisely when the stop matters. And a volatility stop ignores structure; if it lands in the middle of an obvious support shelf, the market will visit it on the way to being right. Use the wider of the volatility level and the structural level.

Related: atr-position-sizing, percent-volatility-sizing, stop-distance, atr

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