Trading Defined
Indicators and ToolsIntermediate

Average True RangeATR

The Average True Range (ATR) measures how much an asset typically moves per period, including gaps; traders use it to size stops and positions.

The Average True Range answers a practical question: how far does this market normally move in one bar?1 It does not say which way, only how much. That makes it one of the most useful tools for risk management — for placing stops outside normal noise, sizing positions so that a volatile stock and a calm one carry the same risk, and spotting when volatility is changing. This entry shows the calculation step by step and the main ways traders use it.

Category
Indicators and Tools
Reading time
5 min
Also called
True range, ATR indicator, ATR stop
Updated

ATR in plain words

For each bar, measure its full range — including any gap from the previous close. Average those ranges over, typically, 14 bars. That average is the ATR.2

A stock with an ATR of $2 usually moves about $2 a day; one with an ATR of $0.50 about 50 cents. ATR is not directional: a rising ATR can come from strong buying or strong selling.2

How to calculate and use ATR, step by step

  1. Find each bar’s true range

    The largest of: high − low; |high − previous close|; |low − previous close|.2

  2. Average it

    The standard ATR uses 14 periods with Wilder’s smoothing: ATR = (previous ATR × 13 + today’s TR) ÷ 14.2

  3. Pick the period

    Shorter averages (2–10) reflect recent volatility; longer ones (20–50) longer-term volatility.2

  4. Set stops in ATR multiples

    A stop a multiple of ATR away — for example 1.5 × ATR — adapts to the market instead of using a fixed distance.2 See Stop Loss.

  5. Size from the ATR stop

    Shares = money at risk ÷ (ATR × multiple). See Position Sizing.

  6. Watch for changes

    Expanding ATR means bars are getting larger; prolonged low ATR often marks consolidation that can precede a bigger move.2

Worked examples

Example 1 — True range with a gap

TR

Previous close $48.00. Today: high $51.50, low $49.80.

Example 1 — True range with a gap — calculation
High − low$1.70
|High − prev. close|$3.50
|Low − prev. close|$1.80
True range$3.50

The gap made the real move much larger than the day’s own range; true range captures it.

Example 2 — Updating the ATR

Smoothing

Yesterday’s 14-period ATR was $2.00. Today’s true range is $3.50.

Example 2 — Updating the ATR — calculation
New ATR($2.00 × 13 + $3.50) ÷ 14 ≈ $2.11

One large day moves the ATR only a little — smoothing makes it stable enough for planning.

Example 3 — Same risk, different stocks

Sizing

Risk $300 per trade, stop at 2 × ATR. Stock A has ATR $0.75; stock B has ATR $3.00.

Example 3 — Same risk, different stocks — calculation
Stock A stop distance / shares$1.50 → 200 shares
Stock B stop distance / shares$6.00 → 50 shares
Loss if stopped$300 in both

ATR sizing gives each trade the same risk regardless of how volatile the stock is.

Figure 1

ATR-based stops in calm and volatile markets

Same start and end, different volatilityBoth stocks start at $100 and finish at $104. The calm one moves about $0.59 per bar on average, so a stop two average moves below the entry sits at $98.82 and is never touched. The volatile one moves about $4.11 per bar, so the same rule puts the stop at $91.78. A fixed $2 stop at $98 would be hit by the volatile stock’s normal swings, even though it ends higher.Low volatilityaverage move per bar ≈ $0.59fixed $2 stop · $982 × average move · $98.82entry $100High volatilityaverage move per bar ≈ $4.11fixed $2 stop · $982 × average move · $91.78$2 stop hitentry $100time →
A stop two average moves away sits close to the entry in a calm market and far away in a volatile one — where a fixed stop would be hit by noise.

Try it: an ATR stop and position size

Enter your entry, the ATR from your chart, a multiple, your account and risk per trade. The calculator shows the stop and the share count. It runs in your browser.

Volatility-based stop and position size
Stop distance (ATR × multiple)$2.40
Stop-loss price$47.60
Maximum loss (1% of account)−$200.00
Shares that keep the risk at that amount83
Position value$4,150.00

A wider stop in a volatile market means fewer shares for the same risk. Gaps can still fill a stop below its price.

ATR vs. other volatility measures

AspectMeasuresUnits
Average true rangeAverage bar size including gaps2Price units
Average daily rangeAverage high − low, ignoring gapsPrice units
Historical volatilityStandard deviation of returnsPercent, annualised
Bollinger Band widthSpread of bands around an averagePercent of price

How traders use ATR

  • Stops

    Placing stops outside normal movement.

  • Position sizing

    Equalising risk across calm and volatile assets.

  • Trailing exits

    Trailing a stop a multiple of ATR below the highest high (a “chandelier” stop). See Trailing Stop.

  • Filtering

    Avoiding markets whose ATR is too small to cover costs. See Slippage.

Advantages and disadvantages

Advantages

  • Includes gaps, unlike a simple high-low range.
  • In price units, so it plugs straight into stops and sizes.
  • Adapts automatically as volatility changes.

Disadvantages

  • Not directional.
  • Backward-looking; volatility can jump suddenly.
  • Absolute values cannot be compared across assets of different prices.
  • The period and multiple are judgement calls.

Going deeper

Read as far as you need. Each level builds on the one before it.

Compare ATR with the price

Beginner

An ATR of $2 is large for a $20 stock (10%) and small for a $400 stock (0.5%). Divide by price to compare assets.

Signals from ATR

Intermediate

High ATR values usually follow a sharp advance or decline and are rarely sustained for long; a price reversal with rising ATR suggests strength behind the move.2

Origins

Advanced

ATR was introduced by J. Welles Wilder, who also created the RSI, for commodity markets where limit moves and gaps made the simple daily range misleading. His smoothing method is the default on most platforms. See Relative Strength Index.

Common mistakes

  1. Reading ATR as direction

    Rising ATR can mean a crash as easily as a rally.

  2. Stops tighter than one ATR

    A stop inside the normal daily move is likely to be hit by noise.

  3. Using a stale ATR

    Recalculate as volatility changes, especially after news.

  4. Comparing raw ATRs

    Use ATR as a percentage of price to compare assets.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1Previous close $30. Today: high $30.80, low $28.90. What is the true range?
Q2ATR is $1.25. You use a 2 × ATR stop and risk $500. How many shares?

Key points to remember

  1. True range includes gaps; ATR averages it, usually over 14 periods.
  2. ATR measures how much, not which way.
  3. Stops a multiple of ATR away sit outside normal noise.
  4. ATR-based sizing equalises risk across assets.
  5. Compare ATR as a percentage of price.

Frequently asked questions

What is a good ATR setting?

14 periods is the standard. Shorter periods react faster to recent volatility; longer ones are smoother.

How many ATRs should my stop be?

Commonly between 1.5 and 3 ATRs, depending on timeframe and strategy. Test what fits your setups.

Does a high ATR mean the price will rise?

No. ATR only measures the size of moves, not their direction.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. StockCharts ChartSchool. Average True Range (ATR) (opens in a new tab) Checked .
  2. Fidelity. Average True Range (ATR) (opens in a new tab) Checked .

Read more elsewhere

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