One of the most destructive habits in active technical analysis is the application of arbitrary fixed-pip or fixed-percentage stop-loss distances across instruments with vastly differing volatility profiles. Placing a 1.0% stop-loss on a low-beta utility equity might provide adequate breathing room, whereas the exact same 1.0% stop on a high-dispersion growth stock will guarantee frequent premature stop-outs during routine intraday noise.
Understanding Wilder's True Range
Developed by J. Welles Wilder Jr. in 1978, the True Range (TR) captures the greatest of three price distances:
- Current High minus Current Low
- Absolute value of Current High minus Previous Close
- Absolute value of Current Low minus Previous Close
By factoring in previous closing prices, True Range explicitly accounts for overnight price gaps and limit moves that standard high-low bar ranges omit entirely. The Average True Range (ATR) is then calculated by applying a 14-period modified exponential smoothing to the sequence of True Range values.
The Volatility-Normalized Position Sizing Formula
To ensure that every trade risks the exact same monetary capital regardless of market turbulence, the position size must be calculated as an inverse function of current volatility:
Position Size (Units) = (Account Equity × Risk Percentage) / (ATR14 × Stop Multiplier)
Consider an account with ₩50,000,000 equity risking 1.0% per trade (₩500,000 risk capital). If an asset trades with an ATR(14) of ₩2,500 and a 2.0x ATR trailing stop is selected (total stop buffer of ₩5,000), the allowable position size is exactly 100 shares. If volatility subsequently doubles and ATR rises to ₩5,000, the allowable position size automatically scales down to 50 shares.
Implementing Chandelier and Multi-ATR Trailing Exits
Rather than anchoring stop orders to arbitrary round numbers, systematic technical analysts deploy Chandelier Exits—anchoring the stop to the highest high achieved since trade inception minus a calibrated multiple (e.g., Highest High22 - 2.5 × ATR14). This trailing architecture allows profitable positions to capture secular trend runs while automatically tightening the defensive threshold as market volatility compresses.