Average True Range
ATR
Average True Range (ATR) measures market volatility by decomposing the entire range of an asset price for a period. Unlike indicators that measure direction, ATR measures the degree of price volatility. It's commonly used for position sizing and stop-loss placement.
Interactive Chart
2.19Parameters
Number of periods for ATR calculation.
Quick Answer
Measures market volatility by decomposing price range. Developed by J. Welles Wilder Jr., ATR was originally designed for commodities markets but works well with stocks.
Trading Signals
Increasing Volatility
NeutralATR rising, indicating increasing price movement
Decreasing Volatility
NeutralATR falling, indicating consolidation
Volatility Spike
NeutralATR significantly higher than recent average
What is ATR?
Developed by J. Welles Wilder Jr., ATR was originally designed for commodities markets but works well with stocks. It measures volatility by looking at the true range (the greatest of: current high-low, current high-previous close, current low-previous close) and averaging it over a period.
How to Read ATR
Higher ATR values indicate higher volatility; lower values indicate lower volatility. ATR doesn't indicate direction, only volatility. Compare current ATR to historical values to gauge relative volatility. ATR often increases during market bottoms due to panic selling.
Using ATR for Trading
ATR is primarily used for: 1) Position sizing - larger ATR means smaller position to control risk, 2) Stop-loss placement - set stops 1.5-3x ATR from entry, 3) Profit targets - use ATR multiples for targets, 4) Volatility breakouts - spike in ATR can signal breakout.
Trading Strategies
ATR trailing stop: Move stop to entry price + (2 × ATR) as price moves in your favor. Position sizing: Risk = Account × Risk% / (ATR × Multiplier). Volatility breakout: Enter when price breaks range with ATR spike.
Formula
True Range = max(H-L, |H-Cp|, |L-Cp|)ATR = 14-period average of True RangeH = High, L = Low, Cp = Previous Close
Tips & Common Mistakes
Pro Tips
- •Use 2x ATR for stop-loss in normal conditions
- •ATR helps normalize position sizes across different assets
- •Higher ATR doesn't mean you should avoid the trade
- •Compare ATR to historical levels for context
Common Mistakes
- •Thinking high ATR means you should sell
- •Using fixed stop-losses ignoring volatility
- •Not adjusting ATR multiplier for trading style
- •Ignoring ATR in position sizing calculations