Average True Range (ATR)

What is Average True Range (ATR)?

Average True Range (ATR) is a volatility indicator, developed by J. Welles Wilder, that averages each bar’s true range: the high-low range extended to include any gap from the prior close. It measures how far price moves per bar in the instrument’s own price units, regardless of direction, across the chart interval.

True range is the maximum of high minus low, the absolute high-to-prior-close distance and the absolute low-to-prior-close distance. Equivalently, it is max(high, prior close) minus min(low, prior close).

That span captures a gap outside the current bar’s high-low range, so an overnight jump counts in full: the example’s $6 true range is twice its $3 high-low range.

How is ATR calculated?

Initialize ATR with the mean of 14 true ranges. For each subsequent observation, calculate new ATR = prior ATR + (current TR − prior ATR) / 14.

The example has a prior close of $100, a current high of $106 and low of $103. The three candidate distances are $3, $6 and $3, so true range is $6.

With prior ATR of $2.40, the new value is (13 × $2.40 + $6) / 14 = $2.66. The chart places this update at bar 8.

How to use ATR for stop distance and position size

Choose a structural invalidation level, then specify any ATR allowance around it. A distance of two ATR equals $5 when ATR is $2.50.

For a stock position, planned shares = loss budget / planned stop distance per share. For a linear futures position, also include the contract’s value per point. Calculate the option position through its own payoff and valuation inputs. The Options Profit Calculator compares structures around the target, expiration and volatility, connecting the underlying’s range with the contract’s modeled outcome.

A trailing rule needs a defined anchor and update rule. For a long, the candidate stop is the highest close since entry minus k × ATR. If the stop must only tighten, use the maximum of its previous level and the new candidate, so the stop only ratchets up.

ATR percent and comparing instruments

ATR percent = 100 × ATR / current close for a positive close. It expresses the price range relative to the instrument’s level. Match the interval, sessions, adjustments and smoothing when comparing readings.

For a breakout, express the price distance in ATR units. A $1 move is 1.25 ATR with an $0.80 reading and 0.125 ATR with an $8 reading. Direction comes from the price setup; ATR supplies its scale.

Limitations of ATR

• Take direction from the price setup and scale from ATR. A rising ATR reading can accompany gains or losses.
• Read the latest true range beside ATR after a sudden expansion. Each 14-period Wilder update moves ATR only 1/14 of the way from its prior value toward the new true range, so a sudden expansion takes several bars to show fully.
• Use ATR percent to compare stocks. Raw ATR is in price units, so a $2 reading means different things on a low-priced and a high-priced stock.
• Match the interval, session, price adjustments and smoothing method before comparing two ATR readings; some platforms use a simple or exponential average instead of Wilder’s.
• Size the position for a gap through the stop. ATR describes past ranges, and a stop placed a set number of ATR away can still be gapped through by a move larger than the average.

Bottom line

Average True Range measures how much an instrument typically moves per bar, gaps included, in its own price units. Use it to scale stops, targets and position size to recent conditions, convert it to ATR percent when comparing instruments, and take direction from the price setup rather than from ATR.