Average True Range (ATR): Measuring How Much Price Moves
ATR measures the typical range an asset moves, not its direction. We explain how to read it, size stop-losses with it, and adapt position size to volatility.
A ruler for volatility, not direction
Average True Range (ATR) answers one question: how much does this asset typically move in a given period? It is a pure volatility measure β it says nothing about which way price will go, only how far it tends to travel. That makes it one of the most practical tools for setting stops and sizing positions.
How ATR is built
ATR takes the "true range" of each bar β the largest of: today high minus low, today high minus yesterday close, or yesterday close minus today low (so gaps are counted) β and averages it over a period, usually 14 bars. The result is expressed in the asset own price units. An ATR of $2 on a $100 stock means it swings about $2 in a typical period; the same $2 ATR on a $10 stock means far more volatility in percentage terms.
Reading it
- Rising ATR: volatility is expanding β often around breakouts, news, or panic. Bigger moves, bigger risk.
- Falling ATR: the market is calming and coiling. Low-ATR periods frequently precede a breakout.
- ATR does not trend up or down with price β it is not overbought or oversold, just high or low.
The two ways traders actually use ATR
- Volatility-based stops: instead of a fixed percentage, place your stop-loss a multiple of ATR away from entry (for example 2Γ ATR). This gives the trade room to breathe in a volatile market and keeps you tight in a calm one β so normal noise does not stop you out.
- Volatility-based position sizing: risk the same dollar amount per trade by trading fewer shares when ATR is high and more when it is low. This keeps your risk constant across assets, which is the core of consistent position sizing.
Common mistakes
- Using ATR as a buy/sell signal β it is not directional.
- Comparing raw ATR across assets without converting to a percentage.
- Setting stops tighter than ATR, guaranteeing you get shaken out by ordinary movement.
Conclusion
ATR measures how far an asset typically moves per period, in its own price units β a ruler for volatility, not direction. Rising ATR means expanding volatility, falling ATR means a calming market that often precedes a breakout. Its real power is practical: set stops a multiple of ATR from entry, and size positions so your dollar risk stays constant whether the market is wild or quiet.
Next step
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