What is ATR?
In short
Average true range — how far a stock typically moves per period. Useful for setting stop distance.
Also known as: average true range
ATR (Average True Range) is a volatility indicator that shows, in dollars, how far a stock typically moves per period. It measures the size of moves, not their direction. Like the RSI, it was developed by J. Welles Wilder.
Formula
First, compute each period's true range (TR) — the largest of:
- High − Low,
- |High − Previous close|,
- |Low − Previous close|.
ATR is the N-period average of TR (14 by default). Including the previous close lets it capture gaps too.
Why it matters
- Stop distance: setting the stop relative to ATR (e.g. 1.5–2 × ATR) puts it outside the stock's normal noise. A calm stock gets a tighter stop, a volatile one a wider stop.
- Position size: when the ATR-based stop gets wider, size gets smaller, so the dollar risk stays the same.
- Expected movement: if ATR is $2, an $8 intraday move is unusual.
Limitations
ATR looks backwards: before earnings or major news it can understate future volatility. It is measured in dollars, so to compare stocks at different prices, convert it to ATR ÷ Price (as a percentage).
ATR(14) = $1.20 — the stock typically moves that much a day. A stop at $79.40 would be hit by an ordinary daily swing. The logical stop is below the last low at $78 with a half-ATR buffer: $77.40. Risk is $2.60 per share.
Example
Illustrative case. Yesterday the stock closed at $50. Today: high $53, low $51 (it gapped up at the open).
- High − Low = $53 − $51 = $2
- |High − Previous close| = |$53 − $50| = $3
- |Low − Previous close| = |$51 − $50| = $1
TR = the largest = $3. The plain range ($2) would have missed the gap.
Now for a stop: the stock is at $60 with ATR(14) = $2.00. A stop 1.5 × ATR = $3 below → $57. Account $10,000, risk 1% = $100:
- Size: 100 ÷ 3 = 33.3 → 33 shares.
- ATR as a percentage: 2 ÷ 60 ≈ 3.3% — about how much the stock usually moves in a day.
You can check this with the position size calculator.
Mistakes and tips
A stop tighter than ATR often gets knocked out by ordinary daily noise — the most expensive result of ignoring ATR.
Cut your size as the stop gets wider: otherwise an ATR stop quietly increases your risk.
Around earnings and major news ATR can understate the real risk — factor in gaps as well.
Frequently asked questions
- How do you set a stop-loss using ATR?
- Typically 1.5–2 ATR away from the entry. That places the stop outside the stock's normal swings, and the position size is then calculated from that distance.
- Is a high ATR bad for a stock?
- No, ATR only shows the size of moves. A high ATR means more opportunity and more risk — size the position accordingly.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- R:R — risk/reward ratioR units, the win rate you need, expectancy and profit factor with numbers; how partial exits change R and how to set realistic targets.Open lesson · 11 min
- Stop-loss: admitting you're wrong in timeWhere to put the stop (structure and ATR), which types exist, gaps and slippage, trailing methods, the pros and cons of moving to breakeven, and the costliest mistakes.Open lesson · 11 min
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