ATR 14 (Average True Range) measures absolute volatility over the last 14 periods. Higher values mean larger typical price moves.
Where it fits
The Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a specified period, typically 14 days. Developed by J. Welles Wilder Jr., ATR captures the full extent of price movement including gaps, making it superior to simple high-low range for measuring volatility. ATR is essential for position sizing, stop-loss placement, and understanding market volatility.
True Range calculation:
True Range = Maximum of: 1. Current High - Current Low 2. |Current High - Previous Close| 3. |Current Low - Previous Close|
ATR-14 calculation:
ATR-14 = Average of True Range over 14 periods
Why ATR matters:
<ul>Using ATR for stop-loss placement:
- 1× ATR stop: Tight stop; may get stopped out by normal volatility
- 2× ATR stop: Standard approach; room for normal movement
- 3× ATR stop: Wide stop; allows for significant volatility
Example:
Stock price: $50 ATR-14: $2.00 2× ATR stop: $50 - $4.00 = $46.00 stop price
Interpreting ATR levels:
- Rising ATR: Volatility increasing; larger moves expected
- Falling ATR: Volatility decreasing; smaller moves likely
- High ATR: Market is volatile; requires wider stops
- Low ATR: Market is quiet; may precede breakout
Position sizing with ATR:
Risk per share = ATR × Stop multiplier Position size = Account risk ÷ Risk per share
ATR characteristics:
- Always positive: ATR cannot be negative
- Relative to price: Compare ATR as percentage of price across stocks
- Not directional: ATR doesn't indicate whether price will rise or fall
ATR is fundamental to professional risk management. Rather than using fixed dollar stops, ATR-based stops adapt to each security's volatility, preventing both premature stop-outs in volatile stocks and inadequate protection in quiet ones.