Have you ever wondered why some stocks seem to jump wildly one day and barely move the next?
Average True Range (ATR) was introduced by J. Welles Wilder in 1978. It helps solve the puzzle of why stocks move so differently. ATR catches gaps and limit moves that simple daily ranges miss.
Wilder suggested using a 14-period ATR. Trading platforms like thinkorswim and Fidelity use this setting for a consistent measure of volatility.
In this guide, you’ll learn how to use ATR for different trading needs. You’ll discover how to use it for entry triggers, stop placement, and more. We’ll walk you through the math behind ATR, how to set it up on your platform, and practical trading rules.
By the end, you’ll know how to apply ATR in real trades. You’ll also learn how to avoid mistakes that can turn ATR into useless noise.
Key Takeaways
- Average True Range measures volatility including gaps and limit moves.
- ATR is non-directional—higher values mean more volatility, lower values mean consolidation.
- Wilder’s 14-period ATR is a common starting point across platforms.
- Use ATR for stop placement, position sizing, and identifying breakouts.
- Compare ATR across stocks by converting it to a percentage of price.
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What Is Average True Range and Why It Matters for Your Trading
The average true range shows how much a market moves, in dollars or points. It’s a key volatility indicator that gives clear insights into price swings. Traders use it to decide when to adjust stops, size positions, or look for breakouts.
Think of the average true range as a simple way to compare risk across different assets. For example, NVDA’s ATR might be a bigger share of its price than Johnson & Johnson’s. This makes it a useful tool for setting stop and limit orders that match real market motion.
Using average true range in your strategy helps you avoid guessing volatility. It gives you an objective measure that works for intraday, daily, or monthly charts. Place ATR-based stops to reduce losses and tune entries to periods of rising activity.
The Origin and Purpose of ATR
J. Welles Wilder created the True Range and ATR in 1978 for trading futures markets. He wanted to capture gaps and extremes, then smoothed it into a 14-period average to show volatility cycles.
Wilder aimed to find low-volatility phases that often lead to rapid expansions. Traders use ATR for breakout systems and to place stops based on volatility. A common rule is to add the ATR to the breakout price to confirm strength and manage risk.
How ATR Differs from Other Volatility Indicators
The atr indicator measures raw price range, not direction. This makes it different from indicators that rely on variance or implied volatility. ATR captures gaps between sessions that many measures overlook.
You can use shorter ATR periods, such as 2–10, to track recent turbulence. Longer periods, like 20–50, smooth out noise for long-term perspective. This flexibility sets ATR apart when comparing intraday scalping to swing trading.
Another key difference is interpretability. Average true range outputs a value you can directly apply to dollar stops and position sizing. Other volatility indicators may require normalization or complex conversion before use.
| Feature | Average True Range | Implied Volatility |
|---|---|---|
| Basis | Price range and gaps | Options market expectations |
| Output | Dollar/points or % of price | Percentage or volatility surface |
| Directionality | Non-directional magnitude only | Non-directional but option-skew sensitive |
| Best use | Stops, position sizing, breakout timing | Option pricing, expected moves |
| Timeframe flexibility | Effective from intraday to monthly | Mostly used for near-term to expirations |
Understanding the Math Behind Average True Range Calculations
Learning about volatility tools starts with simple steps. This part explains the true range formula and how it turns into an average true range for trading. It works for both daily charts and intraday timeframes, useful on platforms like thinkorswim or TradingView.
The True Range Formula Explained
The true range formula catches gaps and big swings missed by simple high-minus-low. For each bar, find three values: today’s high minus today’s low; today’s high minus yesterday’s close; yesterday’s close minus today’s low. The true range is the biggest of these three.
Using absolute values makes sure gap moves count, whether price opens above or below the prior close. This helps avoid underestimating volatility when the market gaps at the open. When you practice calculating atr, first compute the TR for every bar, then use those TRs in your smoothing method.
Converting True Range to Average True Range
To turn true range values into average true range, average them over n bars. This gives a basic view of recent range behavior. Many traders use n = 14, following Wilder’s original setting.
Wilder’s smoothing formula is widely used and labeled as the ATR on many platforms. It’s calculated as: ATR = [(Previous ATR * (n – 1)) + Current TR] / n. Start with a simple average of the first n TR values for the initial ATR, then apply the smoothing formula from there.
Shorter periods, like 2–10, give a faster average true range that reacts to sudden changes. Longer periods, such as 20–50, make the ATR less reactive and better for filtering noise. When choosing how to use atr, match the ATR period to your timeframe and risk rules.
Setting Up ATR on Your Trading Platform
Setting up ATR on your chart is easy. First, open your charting tool and find the studies or indicators menu. On thinkorswim, go to Charts > Edit Studies (the flask icon) > ATR. Most platforms use a 14-period Wilder smoothing by default.
The ATR timeframe matches your chart’s timeframe. So, daily charts show daily ATR, and intraday charts show intraday ATR.
When setting up atr, save it as a template for each trading style. Match the ATR timeframe to your trade timeframe. Day traders use intraday ATR for quick moves. Swing traders need daily ATR for multi-day volatility.
Investors holding positions for weeks or months might prefer weekly ATR for a clearer view.
Choosing the Right ATR Period for Your Strategy
Choose the ATR period based on how fast you enter and exit trades. The standard 14 is a good starting point, as Wilder used it. For fast trading, try shorter lookbacks like 2–10 to spot quick volatility changes.
For swing and position trading, use longer periods like 20–50 to smooth out noise. A 20–50 range gives a steadier ATR, fitting swing setups and trend-following systems. Test different values on historical charts to find the best match for your strategy.
Configuring ATR Display Settings
Decide how you want ATR to appear on the screen. Many prefer it in a separate pane below price for easy reading. Choose a clear line color and moderate thickness for visibility during volatile times.
Consider using ATR percentage mode (ATR divided by price times 100) when comparing different assets. This helps compare volatility across stocks, ETFs, and futures. Some platforms show the calculation method; choose WILDERS for Wilder’s original smoothing or SMA for a simple average.
Add visual guides like horizontal lines at 1x and 2x ATR or dynamic overlays to help place stops. Backtest your display and period choices on platforms like TradingView, thinkorswim, Fidelity, or Charles Schwab before using them live. Save custom templates for specific atr trading strategies to speed up setup and keep your charts consistent.
How to Read and Interpret ATR Values
Learning to read ATR helps you understand price movement strength without guessing direction. The average true range shows the size of recent price ranges. This helps compare symbols like Nvidia, Johnson & Johnson, or the S&P 500.
When looking at ATR values, check the trend. An expanding ATR means daily bars are getting wider. This signals higher activity.
A contracting ATR shows narrow ranges and low volatility. This often signals consolidation.
What High ATR Numbers Tell You About the Market
High ATR readings often follow sharp price moves. These moves can be due to earnings, macro news, or sudden changes in liquidity. These spikes are usually short-lived.
Rising ATR during a reversal shows real conviction behind the move. It tells you if buyers or sellers are in charge. High ATR also warns of the danger of tight stops.
Compare absolute ATR with ATR percent to understand its size for an asset. For example, Nvidia’s ATR of $7.20 is 6.2% of its price. Johnson & Johnson’s ATR of $2.73 is 1.7%. This shows how volatility differs across stocks.
Understanding Low ATR Readings
Low ATR points to quiet days and sideways action. You’ll see narrow ranges and little directional momentum. Prolonged low ATR often precedes a breakout.
Wilder built strategies around low-volatility periods. A long quiet phase tends to set up a larger move later. Use low ATR to identify setups for breakouts.
Remember, ATR measures magnitude, not direction. Watch for shifts from contraction to expansion for trade cues. Use ATR percent to judge if a reading is meaningful for your asset.
Using ATR to Set Optimal Stop-Loss Levels
The Average True Range (ATR) is a useful tool for setting stops. It helps you place stops based on market noise, not just a fixed amount. This method reduces random losses and keeps stops consistent across different markets.
First, pick an ATR period, like 14 days. Then, choose an ATR multiple that fits your trading style and risk level. For short-term trades, a 1× ATR stop might be too tight. Swing traders often use 1.5–2× ATR. Long-term positions might use 3× ATR for more room.
The ATR Multiple Method for Stop Placement
Calculate the ATR and multiply it by your chosen factor. For long trades, subtract this value from your entry to set the stop. For short trades, add it to your entry. This method links stop distance to recent market volatility.
For trailing stops, use a clear rule. The chandelier exit, popular among turtle traders, sets a stop at a fixed multiple from the highest high. A 3× ATR chandelier stop trails upward, protecting gains while allowing for normal market swings.
Backtest your atr multiple across different assets and timeframes. Different markets show different volatility behaviors. Testing helps you find the right balance between avoiding early exits and managing large losses.
Adjusting Stops Based on Market Volatility
ATR changes with market moves. It expands during sharp moves and contracts during calm periods. When ATR rises, widen stops or reduce position size to keep dollar risk stable. When ATR falls, you can tighten stops or increase size, but be cautious not to overfit rules.
Combine atr stop loss placement with position sizing to keep dollar risk constant. For example, if NVDA has an ATR of $7.20 and you enter at $115.88, a 1× ATR stop would be near $108.68. A 3× ATR chandelier stop would start around $94.14 and move up as price advances.
Use clear rules for moving stops. Don’t lower a stop just to squeeze into a trade. Instead, move stops only when price hits a new high or when a trailing rule is triggered. Always test any trailing ATR approach in a paper trade or backtest before using it live.
Position Sizing with Average True Range
Using average true range (ATR) for position sizing helps control losses. It sets a stop distance based on ATR. This way, your dollar risk per trade stays the same, no matter the stock’s volatility.
First, pick a timeframe that fits your trading style. Swing traders might use a 14-day ATR on daily charts. Day traders should look at intraday ATR. This ensures your stop sizes reflect the market’s noise.
Calculating Position Size Using ATR
Start by finding the ATR and decide on a stop multiple (like 1.5× ATR). Then, turn that into a dollar stop distance. Next, set your max dollar risk per trade, usually 1% of your account equity. Divide your dollar risk by the stop distance to find shares or contracts.
For example, if ATR is $2 and your stop is 2× ATR = $4, and you risk $1,000, your position size is $1,000 / $4 = 250 shares. For relative sizing, use ATR percentage to compare stocks like NVDA and Johnson & Johnson. Adjust your size so your dollar risk remains constant.
Risk Management Based on Volatility
Wilder’s systems adjust to volatility cycles. ATR helps manage risk across different assets. Use ATR percent to spot when a stock’s volatility increases, then reduce your position size.
Set limits for high-ATR stocks and limit exposure to correlated assets during spikes. Rebalance sizes as ATR changes. Test your sizing on historical spikes to ensure you can enter and exit trades within your brokerage’s limits.
| Step | Action | Example |
|---|---|---|
| 1 | Determine ATR on matching timeframe | 14-day ATR = $2 on daily chart |
| 2 | Select ATR multiple for stop | 2× ATR = $4 stop distance |
| 3 | Set dollar risk per trade | 1% risk = $1,000 on $100,000 account |
| 4 | Calculate position size | $1,000 / $4 = 250 shares |
| 5 | Adjust for ATR percent and portfolio limits | Cap exposure if ATR% shows high relative volatility |
Identifying Breakout Opportunities Through ATR Changes
Spotting high-probability breakouts involves watching ATR shifts and price movements. Start by scanning for volatility drops. Then, look for increases that show momentum. This method works on various timeframes and fits with common atr trading strategies.
Wilder’s systems show big moves often follow quiet times. He used daily ranges and moving averages to find quiet days. Then, he triggered atr breakout entries when price went beyond the small range plus a multiple of the average true range. You can use this on daily, 4-hour, or intraday charts.
Spotting Volatility Contractions
Look for ATR values going down or near local minima when price gets tight. These signs of consolidation can lead to strong moves.
Use a shorter ATR period for recent compressions and a longer one for longer setups. Compare current ATR percent to historical values for the same asset. An unusually low ATR percent means more breakout chance.
Confirm contraction with price action: narrowing highs and lows, declining volume, or price hugging moving averages. When these signs match, note the setup for backtesting with your preferred atr trading strategies.
Trading Volatility Expansions
An expanding ATR after a contraction signals more volatility and often breakouts. A price push beyond the consolidation with rising ATR shows strength behind the move.
For entries, add an ATR multiple to the breakout level and enter when price clears that threshold. For longs, place your trigger above the range plus a chosen ATR multiple. For shorts, flip the logic and use the lower boundary minus the ATR multiple.
Manage trades with ATR-based stops, such as 1.5–3× ATR or a chandelier exit. This helps ride the expansion while protecting gains. Reduce position size or widen stops when ATR jumps rapidly to limit whipsaw risk.
| Step | Signal | Action | Example |
|---|---|---|---|
| 1 | Volatility contractions | Mark compressing price, falling ATR, low volume | ATR 14 falls to 20th percentile; price in tight range |
| 2 | ATR percent filter | Compare ATR percent to history; avoid extreme values | ATR percent unusually low for Apple over 3 months |
| 3 | Breakout trigger | Enter when price exceeds range + n×ATR | Long when close > range high + 1.5×ATR |
| 4 | Confirmation | Require rising ATR or higher volume on breakout | ATR rises and volume doubles at breakout |
| 5 | Risk control | Use ATR stop or reduce size when ATR expands fast | Stop placed at entry − 2×ATR; reduce size 30% |
Combining ATR with Other Technical Indicators
Mixing the ATR indicator with directional tools gives you clearer trade signals and better risk control. Use ATR to add volatility context to trend and momentum indicators. This pairing helps you avoid low-confidence entries and tune stops so trades survive normal market noise.
ATR and Moving Averages for Trend Confirmation
You can use moving averages like the 50 SMA or 200 EMA to define trend direction while the ATR gauges volatility behind that trend. When price sits above key moving averages and ATR is rising, the trend has momentum and may be more tradable. If ATR falls while price stays above the moving averages, expect weaker follow-through or a range-bound phase.
Apply ATR to set dynamic stops around moving averages. For example, place a stop at the MA minus 2× ATR to give the trade room against normal swings without ignoring trend structure.
Using ATR with RSI and MACD
RSI and MACD provide directional bias and entry triggers. Use ATR to confirm whether those signals have sufficient volatility to matter. An RSI breakout paired with rising ATR suggests stronger conviction and a higher chance of follow-through.
MACD crossovers that occur with expanding ATR tend to sustain moves more often than crossovers with contracting ATR. When you see divergence on RSI or MACD while ATR contracts, treat that signal with caution because volatility support is thin.
ATR in Conjunction with Support and Resistance
Static support and resistance levels will guide your entry and target planning. Use ATR to size entry buffers and stops so you avoid false triggers from routine price noise. A buy stop above resistance plus 1× ATR can reduce whipsaw entries.
When price tests a level with low ATR, expect a cleaner test yet potentially weak momentum. When ATR expands through support or resistance, the breakout or breakdown often carries more substance and follow-through.
| Combination | Signal to Use | ATR Role | Practical Rule |
|---|---|---|---|
| Moving averages + ATR | Price above 50/200 MA | Confirm volatility backing trend | Enter on pullback; stop = MA − 2× ATR |
| RSI + ATR | RSI breakout or threshold cross | Validate momentum strength | Require ATR rising for entry; avoid low-ATR divergences |
| MACD + ATR | MACD crossover or histogram expansion | Measure conviction of move | Take signals only when ATR expands above recent percentile |
| Support/resistance + ATR | Level tests and breakouts | Set buffers and stops to match noise | Place order above level +1× ATR; target uses static level |
Common Mistakes to Avoid When Using ATR
Adding the average true range (ATR) to your trading tools can be very helpful. Many traders quickly learn how to use ATR. But, common mistakes can lessen its effectiveness. This guide will show you how to avoid these mistakes in real trading situations.
Misinterpreting ATR as a Direction Indicator
One big mistake is thinking ATR shows the market’s direction. ATR actually measures the size of recent price movements. It doesn’t tell you if prices will go up or down.
A big jump in ATR can happen during both bullish and bearish trends. Expecting ATR to always point in one direction can lead to bad signals and missed opportunities.
For direction, use price action, trend filters, or momentum indicators. Combine ATR with volume or moving averages before making trades. If ATR suddenly jumps after news, wait for a candle close or a trend confirmation.
Using ATR alone for stops or entries can lead to false breakouts. This is true, even more so around earnings or Fed announcements.
Using Fixed ATR Values Across Different Assets
Another mistake is using the same dollar ATR stop for all markets. A $2 stop on a $20 stock is different from a $2 stop on a $200 stock. Use ATR as a percent or adjust position sizing to keep dollar risk consistent across assets.
Match the ATR period to the trading timeframe and asset class. Intraday traders often use shorter ATR lengths for stocks like Apple or Tesla. Swing traders need a longer ATR for weekly charts.
Don’t change ATR settings often in live trading without backtesting. Frequent changes can lead to inconsistent rules and overfitting.
Other mistakes include ignoring the importance of timeframe alignment and treating ATR moves mechanically. ATR naturally spikes in low-liquidity sessions and around macro events. Plan for these situations instead of reacting to every spike.
When building atr trading strategies, run robust backtests. Combine ATR with directional confirmation and percent-based sizing to keep risk predictable.
Conclusion
The Average True Range is a useful tool for understanding stock market volatility. You can learn how to calculate it and use it on platforms like thinkorswim, Schwab, or Fidelity. This helps you make better trade decisions by knowing the dollar and percentage changes.
Using atr trading strategies can help you set stops and position sizes based on volatility. You can use ATR multiples (1–3×) for stop placement and adjust position size to keep dollar risk consistent. Remember, the atr indicator doesn’t show direction, so use it with other indicators for reliable signals.
Look out for ATR contractions as possible breakout setups and expansions that show momentum. Before trading with real money, test your ATR rules on historical data. Adjust settings and multiples based on the asset and market. With practice, ATR becomes a valuable tool in your trading arsenal.
Keep things simple: learn the basics, add ATR to your charts, test your rules, and refine your strategy. This will help you better understand market swings and manage risk in volatile times.
FAQ
What is the Average True Range (ATR) and who created it?
The Average True Range (ATR) is a tool for measuring market volatility. It was created by J. Welles Wilder Jr. in 1978. It averages the True Range (TR) over a set number of periods, usually 14.ATR shows how much an asset typically moves. It doesn’t tell you which way the price will go. It’s about the size of the moves, not the direction.
How is True Range (TR) calculated?
True Range for a single bar is the largest of three values. These are today’s high minus today’s low, today’s high minus yesterday’s close, or yesterday’s close minus today’s low.Using absolute values makes sure opening gaps count, whether price goes up or down. TR shows the full price movement before it’s smoothed into ATR.
What is Wilder’s ATR formula and how does it differ from a simple moving average?
Wilder’s formula smooths TR into ATR using an exponential method. It’s ATR = [(Previous ATR × (n − 1)) + Current TR] / n, with n often being 14.This formula gives a gradual response to changes in volatility. The simple moving average (SMA) of TR over n periods is easier to calculate but reacts more quickly to changes.
Which ATR period should I use for my trading style?
Start with 14 as the default. For quick trades, use shorter periods (2–10) to reflect recent changes. For longer trades, 14–50 periods work best.Match the ATR period to your trade’s timeframe. This ensures the volatility reading fits your holding period.
How do I set up ATR on platforms like thinkorswim, Fidelity, or Schwab?
Add ATR as a separate pane under your price chart. Use the platform’s studies or indicators menu. Most platforms use Wilder’s 14-period smoothing.Make sure the ATR timeframe matches the chart’s timeframe. You can also show ATR as a percentage for easier comparison across assets.
What does a rising ATR tell me?
A rising ATR means volatility is increasing. Bars or candles are getting bigger, and price is moving more. This is a sign of expanding volatility.Rising ATR during a breakout or reversal shows strong conviction. But it doesn’t show direction. Expect wider price movements and adjust your trading size or stops.
What does a low or falling ATR indicate?
A low or falling ATR means volatility is decreasing. Price ranges are getting narrower. This often precedes significant breakouts.Use low ATR to spot breakout candidates. But confirm with price structure and volume before trading.
How do traders use ATR to set stop-loss levels?
Traders use ATR multiples to set stops. Calculate ATR (e.g., 14-day), choose a multiple (1.0–3.0), and set the stop at entry minus (long) or plus (short) ATR×multiple.Short-term trades might use 1–1.5× ATR. Swing or trend trades often use 2–3× or chandelier exits (e.g., 3× ATR trailing from the highest high).
How should I adjust stops when ATR expands or contracts?
When ATR expands, widen stops or reduce position size. This avoids being caught by increased price noise.When ATR contracts, tighten stops or increase size. But avoid changing stops too often without a rule. Use systematic rules for trailing stops to avoid emotional decisions.
How can ATR be used to size positions?
Use ATR to define stop distance, then size so dollar risk per trade stays constant. For example, if ATR = $2, choose 2× ATR = $4 stop.Then, size your position so you risk $1,000 per trade → position size = $1,000 / $4 = 250 shares. You can use ATR percent for percent-based sizing or comparing different assets.
Can ATR help identify breakout opportunities?
Yes. Look for ATR contractions (falling ATR) while price compresses into a range, wedge, or triangle. A subsequent ATR expansion alongside a price break suggests a meaningful breakout.Confirm with a close beyond the breakout level and rising ATR or volume to reduce false triggers.
How do I combine ATR with other indicators?
Use ATR for volatility context, paired with directional indicators for bias. For trend confirmation, combine ATR with moving averages: rising ATR plus price above a moving average suggests a strong trend.Use ATR with RSI or MACD to confirm momentum signals. Momentum breakouts with rising ATR have higher odds. For entries around S/R, place orders with ATR buffers to avoid noise-triggered losses.
What common mistakes should I avoid when using ATR?
Don’t treat ATR as a directional indicator—it only measures move magnitude. Avoid applying fixed dollar ATR stops across different-priced assets; convert ATR to percent or adapt position sizing.Match ATR timeframe to your trade horizon, don’t switch parameters frequently without backtesting, and account for events (earnings, macro) that naturally spike ATR.
How do I compare volatility across different stocks using ATR?
Convert ATR to a percentage of price: ATR% = (ATR / current price) × 100. This lets you compare volatility across names regardless of share price.For example, NVIDIA with ATR $7.20 at a ~$116 price is ~6.2%, while a less volatile name with lower ATR might be ~1–2%—use ATR% to size positions and screen for suitable volatility.
Should I backtest ATR-based rules before trading live?
Always backtest ATR period choices, ATR multiples for entries and stops, and trailing rules across your asset universe and timeframe. Backtesting reveals how ATR reacts to different market regimes.It helps you select sensible multipliers and stop rules before risking real capital.