The ATR as a stop-loss tool

Stop losses that factor-in market volatility are some of the best, especially when there is no clear support/resistance on the chart. Average True Range (ATR) comes into play here, as it is a very effective tool for setting up a stop-loss. In a nutshell, ATR is a measure of market volatility that incorporates gaps and mutes market noise.

When opening a new long position, subtract an ATR-multiple from the level you enter the position. The ATR-multiplier depends on factors such as market volatility, risk tolerance and holding horizon. The higher the ATR-multiplier, the farther away the stop-loss.

As the market begins to move, trail the stop, but only in the direction of the trade. When in a long trade, set your stop (ATR)*(ATR multiplier) units below the highest price reached after you have opened the position.