How much does it move?
ATR (Average True Range) is the average daily range over N days — a plain measure of volatility in rupees. A stock with an ATR of ₹40 routinely swings ₹40 a day; one with ATR ₹4 barely moves. Same percentage stop means very different things on the two.
The point: a stop-loss should be placed beyond the noise. A common method is 'entry − 2×ATR', so normal daily wiggle doesn't stop you out, but a genuine breakdown does.
Volatility sizing
ATR also right-sizes positions: risk a fixed rupee amount, and let ATR set how many shares that buys. A volatile stock gets a smaller position, a calm one a larger position — so each trade risks the same, regardless of the stock's temperament. (We build this properly in Module 8.)
Setting an ATR stop (worked)
Say a stock trades at ₹800 with an ATR of ₹20. A common approach is entry − 2×ATR for a long, so your stop sits ₹40 below entry at ₹760 — beyond the normal daily wiggle, so ordinary noise won't hit it, but a genuine breakdown will. On a calmer stock with ATR ₹5, the same 2×ATR stop is just ₹10 — the method automatically adapts to how the stock breathes.
Size from the stop
The ATR stop then sets your size. Risk a fixed rupee amount (say ₹5,000) and shares = risk ÷ stop-distance. With a ₹40 stop that's 125 shares; with a ₹10 stop, 500 shares. A volatile stock automatically gets a smaller position, a calm one a larger — so every trade risks the same, whatever the stock's temperament.