What Is Average True Range, Really?

Average True Range (ATR) is a volatility gauge, not a crystal ball. It won’t tell you where the market’s going—but it’ll tell you how violently it’s getting there.

J. Welles Wilder built it for commodities, but traders now slap it on everything: stocks, futures, ETFs, you name it.

The Core Idea

ATR tells you the average range a price moves over a set number of periods—usually 14.

That range? It’s not just the day’s high minus low. It also considers gaps:

• Today’s high minus today’s low
• Absolute value of today’s high minus yesterday’s close
• Absolute value of today’s low minus yesterday’s close

Take the biggest of the three. That’s your True Range (TR). Average that over n periods, and you’ve got ATR.

How to Calculate ATR

Let’s get practical. Say you’re using a 14-day ATR. Here’s the process:

1. Calculate the true range for each of the 14 days.
2. Average those 14 values.

If you’re just getting started and have no previous ATR, the formula is:

ATR = (1/n) × Σ TR
Where n is the number of periods and TR is true range per day.

Quick Example

Say the daily high-low differences for 14 days add up to $16.65.

ATR = $16.65 ÷ 14 = $1.18

So the average daily move is $1.18. That’s your volatility baseline.

Why ATR Matters in Real Trading

1. It Sizes Your Risk

Position sizing isn’t about conviction—it’s about volatility. Bigger ATR? Smaller position. Tighter ATR? Size up.

Traders often use a fixed-dollar risk approach like this:

• Risk per trade: $500
• ATR: $1.00
• Position size = $500 ÷ $1.00 = 500 shares

That’s sane sizing based on the actual market environment. For a breakdown of how swing trading stacks up against options, including sizing differences, check out this detailed guide.

2. It Powers Smarter Stops

Flat stops are for flat-footed traders. ATR-based stops adapt.

Use a multiple of ATR, like:

• Conservative: 1.0 × ATR
• Moderate: 1.5 × ATR
• Loose: 2.0 × ATR

This lets your stops flex with volatility instead of getting hunted every time the market breathes funny.

3. It Identifies the Mood

• Rising ATR = rising volatility
• Falling ATR = calm, maybe coiling
• Sudden spike in ATR? Volatility regime change

Just don’t forget: ATR doesn’t say which way the market’s moving—just that it’s moving a lot.

To learn how volatility fits into breakout strategies, study the TTM Squeeze Indicator—a popular tool for pre-move compression detection.

How Traders Actually Use It

The “Chandelier Exit”

Chuck LeBeau’s twist on trailing stops.

• Find the highest high since entry
• Set your stop at: High – (Multiplier × ATR)

That trailing stop adjusts as the asset climbs but widens with increased volatility. It’s less likely to kick you out early.

Entry Triggers

One method:

• Add ATR to the most recent close
• If next day’s price breaks that level, it could signal a breakout

This doesn’t predict direction. But it does highlight when the market’s waking up.

A great real-world example is Marios Stamatoudis’s approach to tight risk and explosive setups, which helped him achieve a 291% return.

When Average True Range (ATR) Misleads

1. It’s Directionless

ATR measures movement, not bias. A spiking ATR might look bullish… until it doesn’t. Pair it with directional tools.

For example, Relative Strength Line analysis helps confirm whether volatility is favoring bulls or bears.

2. It’s Subjective

There’s no magical ATR number. A $1.50 ATR is big for one asset and tiny for another. Know the asset’s normal.

3. It Lags

Like all moving averages, ATR smooths out over time. You’ll feel the aftershocks, not the first tremor.

Final Word

Average True Range (ATR) isn’t flashy. It doesn’t give buy or sell signals. But it does tell you how the market’s breathing—and that’s critical.

Use it to size your trades, protect your exits, and know when volatility’s about to punch you in the face. That’s how pros use ATR. Not as a magic bullet—just another sharp tool in the belt.