Average True Range (ATR): How to Calculate It and Set Stops

A stop 40 cents under your entry, on a stock that moves $3 a day, will be hit by ordinary noise before the trade has a chance to work. You can see the $3 by eye on some charts. ATR gives you the number.

True range, one bar at a time

A bar’s plain range is its high minus its low. That misses gaps. If a stock closes at $48 and opens the next morning at $50, the $2 jump happened overnight and never appears inside the second bar’s high and low. J. Welles Wilder fixed that with true range, which takes the largest of three distances:

• High minus low.
• The distance from the high to the previous close.
• The distance from the low to the previous close.

The second and third are absolute values, so direction does not matter.

The day’s own bar was only $1.50 tall. The gap doubled it.

From true range to average true range

ATR is a smoothed average of those true ranges, usually over 14 bars. Wilder’s smoothing starts from a simple average of the first 14 true ranges, then updates each day by keeping thirteen parts of the old ATR and adding one part of the new true range.

One wide day barely moves it. That is deliberate: ATR describes the stock’s normal stride, and a single shock gets folded in slowly over the following weeks, so the number you read today reflects the last month or so of trading more than yesterday’s surprise.

How it shows up on a chart

ATR sits in a panel below the price chart as one line, labeled something like “ATR (14)”, with its current value in dollars at the right edge. The panel has no zero-to-100 scale and no overbought line. When the line climbs, bars are getting wider. When it sinks, they are getting narrower.

Some platforms can also plot ATR bands or an ATR trailing stop on the price chart itself, and those are the same number drawn a set multiple away from price, moving out when the bars widen and back in when they narrow.

Stops and position size

The usual rule is to put the stop a fixed number of ATRs from entry, often two. That keeps the stop outside the stock’s everyday swing, and it adjusts on its own: a quiet stock gets a tight stop, a wild one gets a wide stop.

Then let the stop size the trade. Decide your loss if the stop is hit. Divide it by the stop distance to get the share count.

The position size calculator does this for any account and stop. Double the ATR and you buy half the shares for the same dollar risk.

ATR also lets you compare volatility across stocks. Divide ATR by price. A $2 ATR on a $40 stock is 5% a day; on a $100 stock it is 2%. That comparison is part of why swing trading ETFs first suits new traders, since broad funds tend to post smaller ATR percentages than single stocks.

What people get wrong

Reading ATR as a signal is the first error. A rising line is often treated as bullish, which it isn’t; it only says the bars are wider.

The second is keeping a stop set from an old ATR after the stock has changed character, for instance after earnings, when the true ranges have doubled and the stop that was two ATRs away is now one.

The third is comparing raw ATR values across stocks at different prices.

Related terms

Bollinger Bands also measure volatility, using the standard deviation of closes, so the high and low of each bar never enter the sum. ATR shows up among the swing trading indicators worth keeping mostly for the job above: setting stops and size.