Technical Analysis · Intermediate · 5 min
ATR: measuring volatility
You can read an ATR panel, explain why ATR rises in volatile phases and falls in calm ones, and use it to judge stop distances and expectations.
Calm, then wild
Some weeks a share barely moves. Each candle is small, and a 1% day feels like news. Then something changes, and it swings by several percent a day for weeks.
Those two phases need very different stops, position sizes and expectations. The average true range turns the difference into a single line, and it is one of the few indicators that tries to measure only one thing.
How far, not which way
The average true range, or ATR, was introduced by J. Welles Wilder in his 1978 book, together with the RSI. The lesson on ATR-based position sizing explained the calculation:
- The true range of a bar is its full span including any gap from the previous close: the largest of high minus low, high minus previous close, and previous close minus low.
- The ATR averages the true range over a number of bars, usually 14, with Wilder's smoothing.
How to read it:
- Rising ATR: typical moves are getting larger. The market is becoming more volatile.
- Falling ATR: moves are getting smaller. The market is calming down.
- Direction: none. A rising ATR can come with a crash or a rally. StockCharts' guide stresses that ATR does not indicate price direction, just volatility.
ATR is measured in price units. An ATR of 2 means something different on a share at 40 than on one at 400. Dividing the ATR by the price gives a percentage that can be compared across assets: 2 on 40 is 5% a day, 2 on 400 is 0.5%.
Traders use ATR mainly to set expectations and risk: how far a stop should be from the entry to stay outside normal noise, how large a position can be for a given risk, and how far a price might typically move in a day or a week. It also helps to recognize when calm conditions are ending.
Five times as wild
In the fictional chart, the first 25 candles drift calmly from 40 to 42. Most candles are about a third of a point tall, and the 14-period ATR stays near 0.31.
- On candle 28, the price drops from 42.36 to 40.03 within one bar, a true range of more than two points.
- Over the next 20 candles, the price swings between about 37.60 and 43.80.
- The ATR rises steadily, to about 1.65 by candle 46, more than five times its calm level.
A trader with a stop 0.60 below the entry, about two ATRs in the calm phase, would have been stopped out by normal movement almost every day in the wild phase. With a stop at two ATRs in the volatile phase, about 3.30, the position would need to be about five times smaller for the same risk in money.
Common mistakes
- Reading ATR as direction. It measures size, not sign.
- Comparing raw ATR across assets. Divide by the price first.
- Keeping old stops in new conditions. When ATR changes a lot, revisit stops and size.
- Expecting ATR to warn early. It is an average of past bars and lags sudden changes.
The takeaway
ATR shows how far the price typically moves per bar. It rises when markets get wild, falls when they calm down, and says nothing about direction.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the candle where the calm phase clearly ended.
Tap the chart.
Candle 28 ran from 42.36 down to 40.03, a range of more than two points, after weeks of candles about a third of a point tall. The ATR starts rising from there.
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2What does the ATR measure?
ATR averages the true range, which includes gaps from the previous close. It is a measure of volatility only.
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3The ATR doubles. What follows for a stop placed at the same distance as before?
When typical moves grow, a fixed stop moves into the noise. The risk lesson on ATR showed how to adjust size instead.
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4A share's ATR is 2 on a price of 40. Roughly what daily movement is normal?
ATR is in price units. Dividing by the price, 2 ÷ 40 = 5%, makes it comparable across assets.
of 4 correct.
Sources
- StockCharts ChartSchool: Average True Range (ATR)
- J. Welles Wilder: New Concepts in Technical Trading Systems (1978, book)