Question on using ATR for position sizing
Hey everyone, been lurking here a while and trying to get a better handle on risk management. I've read about using ATR (Average True Range) to size positions, setting stop losses a certain multiple of ATR away, and then adjusting the position size so that a defined percentage of your capital (say, 1%) is at risk if that stop is hit. It makes sense in theory, as it accounts for an asset's volatility.
However, in practice, I find myself sometimes getting stopped out more frequently than I'd like, even with seemingly reasonable multiples (e.g., 2x ATR). Or, conversely, the position size gets so small on very volatile assets ($TSLA, $NVDA sometimes) that the potential profit just doesn't seem worth the effort. Am I fundamentally misunderstanding how to apply this, or is it more nuanced in its application? Do you factor in other variables when using ATR, or does anyone have a different preferred method for dynamic position sizing?
The theory is sound, but in practice, you need to be careful with how you define your ATR period and what multiple you use. Too tight, and you'll get whipsawed; too loose, and your risk per trade will be too high on low-volatility assets.