Average True Range (ATR)

What is ATR?

The Average True Range was developed by J. Welles Wilder (same creator as RSI) and published in his 1978 book "New Concepts in Technical Trading Systems." It measures market volatility — specifically, the average range of price movement over a period.

ATR does not indicate direction. It only measures how much the price moves, on average, per bar.

Formula

True Range (TR) = MAX of:
  1. High – Low
  2. |High – Previous Close|
  3. |Low  – Previous Close|

ATR = Wilder Smoothing of TR over N periods
    = (Previous ATR × (N-1) + Current TR) / N

Parameters

How to Use ATR

Stop-Loss Placement

The most common use of ATR is volatility-based stop-loss placement:

Long stop-loss  = Entry Price – (2 × ATR)
Short stop-loss = Entry Price + (2 × ATR)

This ensures your stop is placed far enough away to avoid normal market noise.

Position Sizing

ATR-based position sizing keeps risk constant across different stocks:

Position Size = Risk Amount / (ATR × Point Value)

Breakout Confirmation

High ATR on a breakout candle = strong conviction. Low ATR on a breakout = weak, likely to fail.

Signal Interpretation

• Rising ATR → Volatility expanding; trending move or news event
• Falling ATR → Volatility contracting; consolidation phase
• ATR spike → Major news or earnings; abnormal volatility — be careful
• Very low ATR → Tight range squeeze; big move may be imminent (similar to BB squeeze)

Tips & Best Practices

• ATR is not directional — it tells you HOW MUCH price moves, not WHERE it moves.
• Use ATR to adapt your stop-losses to current market conditions rather than fixed pip/point stops.
• When ATR is high, take smaller position sizes. When ATR is low, you can take larger positions.
• ATR as a % of price is more useful than raw ATR for comparing across different stocks.