ATR
The average size of an instrument’s price range per period, including gaps.
Also called: average true range
Written by Javier Sánchez Ros
In plain language
True Range is the largest of: the current high minus low, the high minus the previous close, or the low minus the previous close. Including the previous close is what captures gaps.
ATR averages that over a lookback, usually 14 periods, and reports it in the instrument’s own price units. An ATR of $1.20 means the instrument typically travels about $1.20 in a period.
ATR has no direction. It tells you how far price moves, never which way.
The formula
True Range
max(High − Low, |High − Prev Close|, |Low − Prev Close|)
- ATR
- Average of True Range over N periods, usually 14
Worked through
From an ATR reading to a share count in three steps
- ATR(14)
- $2.40
- Stop distance at 1.5×ATR
- $3.60
- Risk budget
- $600
- Position size
- 166 shares
This is the whole bridge. The chart produces one number — how much this instrument typically moves — the trader chooses a multiple, and the result divides into the risk budget to give a share count. No opinion about direction enters anywhere.
What it replaces is a fixed stop applied to everything. A flat $2 stop is generous on an instrument with an ATR of $0.60 and inside a single day’s noise on one with an ATR of $2.40, so the same rule produces wildly different real risks depending on what it is pointed at.
The reading is an average of the last fourteen true ranges, which includes gaps — that is what separates true range from the high-minus-low of a single session, and it is why the number is usable on instruments that gap.
Its weakness is being a trailing average. When volatility is expanding, ATR is describing the calm that preceded it and understates the room now required, which is exactly the moment a stop set from it is most likely to be taken out.
Why it matters
ATR is the most practical bridge between a chart and a position size. It turns "this instrument is volatile" into a specific stop distance you can divide your risk budget by.
Common mistakes
- Comparing ATR values across instruments with different prices. Use ATR as a percentage of price instead.
- Setting stops inside 1 ATR and being surprised by routine noise.
- Assuming today’s ATR will hold through a scheduled event.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
How much and how quickly an asset’s price moves over a given period.
A stop placed at a multiple of the instrument’s Average True Range rather than a fixed percentage.
The gap between your entry and your stop loss — your risk on a single unit.
The amount of an asset you buy or sell in a single trade.
A moving average with volatility bands plotted a set number of standard deviations above and below.