ATR (Average True Range)

The Average True Range (ATR) measures how much an asset typically moves in one period, in price units. J. Welles Wilder introduced it in 1978. ATR does not tell you direction; it tells you how volatile a market is right now. That makes it one of the most practical tools in trading, used to set stops that respect normal noise, to size positions so each trade risks a similar amount, and to compare volatility across markets.

True range#

A candle's simple range is its high minus its low. But if a market gaps, that range misses the move between the previous close and today's prices. Wilder's true range fixes this:

True range = max(High − Low, |High − Previous close|, |Low − Previous close|)
ATR = average of true range over n periods (usually 14, smoothed)

What ATR tells you#

An ATR of $2.50 on a stock means it has moved about $2.50 per day on average recently. Higher ATR means bigger swings; lower ATR means calmer trading. ATR in price units makes it easy to plan stops and targets, but to compare markets, divide by price to get ATR as a percentage.

Stock B has the larger ATR in dollars, but Stock A is twice as volatile relative to its price.

Using ATR for stops#

Placing a stop inside an asset's normal daily movement invites being stopped out by noise. A common approach is to place stops a multiple of ATR away from entry or from a structure level:

• 1 to 1.5 × ATR: tight; suits short term trades.
• 2 to 3 × ATR: typical for swing trades.
• Chandelier exit: trail a stop 3 × ATR below the highest high since entry. See Trailing Stop Orders.

Combining ATR with structure works well: place the stop beyond the swing low plus a fraction of ATR as a buffer. See Stop Loss Strategies.

Using ATR for position sizing#

ATR lets you size positions so each trade carries similar risk, regardless of how volatile the asset is.

This is the basis of volatility based sizing used by many trend following systems. See Volatility and ATR-Based Sizing.

Other uses#

• Volatility filter: avoid trading when ATR is extremely high (risky) or extremely low (dead market), or look for low ATR as a sign of compression before a breakout. See Compression and Expansion.
• Target setting: a target of 2 or 3 times ATR gives a realistic sense of how far price might move in a few days.
• Building block: Supertrend and Keltner Channels use ATR. See Supertrend and Keltner Channels.

Settings#

The standard period is 14. Shorter periods react faster to changes in volatility; longer periods give a steadier reading.

Common mistakes#

• Reading ATR as directional. Rising ATR means more movement, up or down.
• Comparing ATR in dollars across very different prices.
• Using the same fixed stop distance in all markets instead of adapting to volatility.

Frequently asked questions#

What does ATR measure?#

How much an asset typically moves per period, including gaps, showing its current volatility in price units.

How do you use ATR for a stop loss?#

Place the stop a multiple of ATR away from your entry or beyond a structure level, often 1.5 to 3 times ATR depending on your timeframe.

Does a high ATR mean the price will go up?#

No. ATR measures the size of movement, not its direction.

Sources#

• Wikipedia, Average true range