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Average True Range (ATR): The Volatility Indicator Every Trader Needs

Average True Range (ATR) is a technical indicator that measures market volatility by calculating the average range of price movement over a specific period. Created by J. Welles Wilder in 1978, ATR helps traders understand how much a stock typically moves, making it invaluable for risk management and position sizing.

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Average True Range (ATR): The Volatility Indicator Every Trader Needs

What Is Average True Range?

Average True Range (ATR) is a volatility indicator that shows how much an asset moves, on average, during a given time frame. Unlike other indicators that measure direction, ATR purely measures volatility鈥攖he degree of price movement regardless of direction.

Note: ATR is expressed in dollar terms for stocks (or the currency the stock trades in), not as a percentage. A stock with an ATR of $2.50 moves an average of $2.50 per day.

How ATR Works

ATR calculates the greatest of three values for each period:

  • Current high minus current low
  • Current high minus previous close (absolute value)
  • Current low minus previous close (absolute value)

This "True Range" captures gaps and limit moves that simple range calculations would miss. ATR then averages these True Range values over a specified period, typically 14 days.

Calculating ATR Step-by-Step

ATR Formula

True Range (TR) = MAX of:
  鈥� Current High - Current Low
  鈥� |Current High - Previous Close|
  鈥� |Current Low - Previous Close|

ATR = Moving Average of True Range over N periods

Example Calculation:

Let's calculate TR for a stock with:

  • Current High: $52.50
  • Current Low: $51.00
  • Previous Close: $51.75

TR calculations:

  • High - Low = $52.50 - $51.00 = $1.50
  • |High - Previous Close| = |$52.50 - $51.75| = $0.75
  • |Low - Previous Close| = |$51.00 - $51.75| = $0.75

True Range = $1.50 (the maximum value)

Using ATR in Trading

1. Setting Stop-Loss Orders

Many traders use ATR multiples for stop-loss placement. A common approach is setting stops at 2x ATR below the entry price for long positions.

Pro Tip: For a stock trading at $100 with an ATR of $2, a 2x ATR stop would be placed at $96 ($100 - 2 脳 $2).

2. Position Sizing

ATR helps determine appropriate position sizes based on volatility. Higher ATR stocks require smaller positions to maintain consistent risk.

3. Identifying Volatility Changes

Rising ATR indicates increasing volatility, often preceding significant price moves. Falling ATR suggests consolidation.

Insider Insight: Watch for ATR compression鈥攚hen ATR falls to multi-month lows, it often precedes explosive moves. Think of it as a spring coiling before release. Professional traders scan for stocks where ATR has contracted 40-50% from recent peaks.

4. Comparing Stock Volatility

ATR allows apples-to-apples volatility comparison between stocks, regardless of their price levels.

Using ATR with StockTitan Data

While calculating ATR manually can be time-consuming, you can use StockTitan's comprehensive market data to track volatility patterns:

  • AG真人官方-time Price Data: Access high, low, and closing prices for accurate TR calculations
  • Historical Charts: View past price movements to understand typical volatility patterns
  • News Correlation: Match volatility spikes with news events using our real-time news feed
  • Momentum Scanner: Identify stocks experiencing unusual volatility beyond their normal ATR

Pro Tip: Use StockTitan's price alerts to notify you when a stock moves beyond its typical ATR range, signaling potential breakout opportunities.

ATR Calculator

Calculate ATR for Your Stock

Common ATR Strategies

ATR Trailing Stop

The ATR trailing stop adjusts with volatility, tightening in calm markets and widening during volatile periods. This dynamic approach prevents premature stop-outs while protecting profits.

ATR Breakout Strategy

Traders watch for price moves exceeding 1x or 2x the daily ATR, signaling potential breakouts from consolidation. When a stock moves more than its typical daily range, it often indicates unusual buying or selling pressure that could continue.

Note: A stock with a 14-day ATR of $1.50 that suddenly moves $3.00 in a day (2x ATR) is experiencing abnormal volatility, often accompanying news events or technical breakouts.

Volatility-Based Position Sizing

Risk a fixed dollar amount per trade, but adjust share size based on ATR. This equalizes risk across different volatility environments.

Position Sizing Example:

With $1,000 risk per trade:

  • Stock A: ATR $1, Stop at 2x ATR = Buy 500 shares
  • Stock B: ATR $5, Stop at 2x ATR = Buy 100 shares

Both positions risk the same $1,000 despite different volatilities.

Limitations and Considerations

Warning: ATR has several limitations traders should understand:

  • No Direction Information: ATR only measures volatility magnitude, not price direction
  • Historical Basis: ATR is backward-looking and may not predict future volatility
  • Gap Sensitivity: Large gaps can skew ATR readings temporarily
  • Period Dependency: Different ATR periods (7, 14, 21 days) produce different values
  • Not Percentage-Based: Direct ATR comparison between different-priced stocks can be misleading

Frequently Asked Questions

What is a good ATR value?

There's no universally "good" ATR value. It depends on the stock's price and your trading style. Generally, day traders prefer higher ATR stocks for more movement opportunity, while investors might prefer lower ATR for stability.

What's the best ATR period setting?

The standard 14-period ATR works well for most traders. Shorter periods (7-10) respond faster to volatility changes, while longer periods (20-30) provide smoother readings.

How is ATR different from standard deviation?

While both measure volatility, ATR uses the True Range concept to capture gaps and limit moves, making it more comprehensive for trading purposes. Standard deviation measures dispersion from the mean.

Can ATR predict price direction?

No, ATR is non-directional. It tells you how much a stock might move, not which direction. Combine ATR with trend indicators for directional bias.

Should I use ATR for all stocks?

ATR works best for liquid stocks with regular trading. For thinly traded stocks or those with irregular gaps, ATR readings may be less reliable.

How do I use ATR for day trading?

Day traders often look for stocks with ATR above $1-2 for sufficient intraday movement. They use fractional ATR values (like 0.5x ATR) for tighter stops on shorter timeframes.

Disclaimer: This article is for educational purposes only and should not be considered investment advice. ATR is one tool among many and should be used in conjunction with other analysis methods. Always conduct your own research and consider consulting with qualified financial advisors before making trading decisions.