Average True Range (ATR)

Average True Range (ATR) measures how much a stock typically moves in one bar. It says nothing about direction, only about volatility. J. Welles Wilder introduced it in 1978, originally for commodities, where price gaps between sessions are common. Today it is one of the most practical tools for setting stops and sizing positions.

How ATR is calculated

First find the true range of each bar: the largest of these three values.

True range = max( High - Low,
                  |High - Previous close|,
                  |Low  - Previous close| )
ATR(14)    = Wilder average of the true range over 14 bars

Using the previous close captures gaps: if a stock gaps up $3 and then trades in a $1 range, its true range is about $4, not $1. ATR is measured in price units, so a $500 stock naturally has a larger ATR than a $20 stock. The normalized ATR (NATR) divides ATR by the close and expresses it as a percentage, which makes stocks comparable.

How traders use ATR

• Stops. A stop placed a multiple of ATR away from the entry, typically 2 to 3 ATR, adapts to each stock’s normal noise. A volatile stock gets a wider stop, a quiet one a tighter stop.
• Trailing stops. A stop that trails the highest high by a multiple of ATR (the idea behind the chandelier exit) lets winners run while protecting profits.
• Position sizing. Dividing the amount you are willing to risk by the ATR-based stop distance gives a position size that risks roughly the same amount on every trade.
• Volatility regime. Rising ATR means the market is becoming more volatile, often during selloffs or breakouts. Falling ATR means it is calming down, often before a breakout.
• Breakout filters. A move of more than one ATR in a day stands out from normal noise and is more likely to be significant.

Common mistakes

• Reading ATR as a trend signal. A rising ATR can come with rising or falling prices. Combine it with a trend tool.
• Comparing raw ATR across stocks. Use NATR (ATR as a percentage of price) instead.
• Stops that are too tight. A stop closer than about one ATR is likely to be hit by ordinary daily movement.

Live chart: SPY (S&P 500 ETF), daily, with ATR(14). The chart updates every trading day.

Screen for it on MarketInOut

Our formula language has atr(period) in price units and natr(period) as a percentage of price. Highly volatile stocks, moving more than 5% a day on average:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and natr(14) > 5

Calm stocks in an uptrend, with an average daily range under 2%:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(50) and natr(14) < 2

Related: Bollinger Bands, ADX and directional movement, Moving averages.