Average true range as a shared unit for size, pairs, and stops

What average true range measures

Average true range is treated as an unbounded, instrument-specific volatility measure. It is used for risk planning and profit objectives rather than as a conventional leading or lagging oscillator.

True range is the largest of the latest high minus low, the absolute latest high minus prior close, and the absolute latest low minus prior close. Average true range is that series averaged over a chosen lookback.

A 14-day average true range is the commonly supplied default. Additional windows of 5, 10, 30, and 65 days, plus six-month and one-year windows, are used for comparison.

Single-name size

Volatility position sizing uses current volatility, not raw price, as the unit that keeps exposure comparable across names and throughout the life of the position.

Average true range position sizing scales quantity from account equity and that instrument's average true range so a planned stop distance maps to a bounded loss before the trade is placed.

Single-instrument size can be built from average true range as a percentage of price, from that value relative to an index ETF's average true range, or from average true range combined with a permitted percent-of-range move until a fixed or trailing stop.

Pair size from a combined series

Pairs trading is the trade of a combined two-name spread with testable entry, exit, and abstention rules, either as occasional signal trades or as more frequent mean-reversion noise trades.

Paired instruments require a combined spread series so pair size can be scaled inversely to pair average true range. The archive illustrates 100 by 100 shares when pair average true range is 1.00, versus 200 by 200 shares when that pair reading is 0.50.

When two names have average true ranges of 3.00 and 2.50 but the pair reading is 0.50, the pair is treated as statistically muted. A pair reading of 5.00 is treated as more frequently divergent. Correlation and cointegration are listed as companion pair metrics.

A pair-book planning benchmark is about one average true range per week per pair, assembled from 10-20 percent range scalps or 3-5 day swings. The archive does not plan on one average true range per day, because losing trades must be absorbed over a larger sample.

Percent-of-range locations

A move can be measured as a fraction or multiple of current average true range and used to place fades, targets, or stops on a volatility scale.

Percent-of-range locations used for fade-style entries and exits include 45-65 percent for short-horizon reversals, 85-120 percent for larger reversals, 140-180 percent for extended moves, and beyond 200 percent as a sign of a stronger driving force. The same locations are applied to both pairs and single names.

A signal model reads average true range extremes on a chart or alert. It marks unusual volatility, but it is treated as offering fewer repeatable trades than mid-range conditions. A noise model is a mean-reversion framework for names or pairs that stay contained and reverse inside the session. It is intended to handle the larger set of trades that occur away from volatility extremes.

Stops that can later trail

An average true range stop can begin as a fixed percent-of-range stop from entry or from a price level. It can later become a trailing stop that tightens if the market or group weakens or the instrument slope steepens.