What Is ATR? Average True Range Explained
ATR (Average True Range) measures market volatility by calculating the average range between high and low prices. Learn how ATR works and why volatility matters.
The Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder Jr. that measures the degree of price movement in a stock. Unlike momentum indicators that show direction, ATR shows how much a stock typically moves—helping traders understand the character of price action and set appropriate stop-loss levels.
How ATR Is Calculated
ATR is calculated as the moving average (typically 14 periods) of the True Range. The True Range is the greatest of: the current high minus the current low, the absolute value of the current high minus the previous close, or the absolute value of the current low minus the previous close.
How to Use ATR
ATR is primarily used for volatility assessment and risk management, not for generating buy or sell signals.
Stop-Loss Placement
Traders often use ATR to set stop-loss distances. A common approach is placing stops 1.5x or 2x ATR away from the entry price, which accounts for normal price fluctuations.
Position Sizing
ATR helps determine position size based on risk tolerance. Higher ATR means larger price swings, which may warrant smaller positions to maintain consistent risk levels.
Volatility Assessment
Comparing current ATR to historical ATR shows whether volatility is expanding or contracting. Expanding ATR may signal increasing uncertainty; contracting ATR may signal consolidation.
Key Takeaways
- •ATR measures volatility by calculating the average range of price movement.
- •It does not indicate direction—only the magnitude of price swings.
- •ATR is commonly used for stop-loss placement and position sizing.
- •Higher ATR means higher volatility; lower ATR means lower volatility.
Frequently Asked Questions
What is a good ATR value?
There is no universally "good" ATR value. ATR is relative—a $5 ATR might be high for a stable utility stock but low for a volatile tech stock. Compare ATR to the stock's price and historical ATR levels.
Important Limitations
ATR is a backward-looking indicator based on historical price ranges. It does not predict future volatility. ATR values change over time and vary significantly between stocks, making direct comparisons across different securities less meaningful. StockVantex displays ATR as part of its risk and volatility analysis.