Average True Range (ATR)

What Is an Average True Range (ATR)?

The Average True Range (ATR) is a technical analysis indicator that measures how much a security's price typically moves in a day. It does not show price direction. Instead, it shows the degree of volatility over a chosen number of periods. A higher ATR means larger average price swings, and a lower ATR means calmer trading.

The indicator was developed by J. Welles Wilder Jr. and described in his 1978 book, New Concepts in Technical Trading Systems.

How It Works

ATR starts with the true range for each period. True range is the greatest of three values: the current high minus the current low, the absolute value of the current high minus the previous closing price, and the absolute value of the current low minus the previous closing price. Including the previous close captures gaps between trading sessions, which a simple high-low range would miss.

The true range values are then averaged using a smoothing method, a form of moving average:

ATR = ((Prior ATR × (n − 1)) + Current True Range) ÷ n

Here n is the number of periods. A 14-period setting is commonly used. The first ATR value is usually the simple average of the true ranges over the first n periods.

An Example

Suppose a stock's 14-day ATR is 2.50 dollars. This would mean that, on average over the past two weeks, the stock's daily trading range has been about 2.50 dollars. If the ATR later rises to 4.00 dollars, the stock has been moving more widely than before, even if its price has not changed much overall.

Uses and Limitations

Investors use ATR in several ways. It helps gauge how volatile a security has been, which can inform position sizing decisions. Some traders set stop-loss order levels a multiple of ATR away from their entry price, so that normal daily fluctuations are less likely to trigger them. ATR can also compare volatility across securities or across time.

The indicator has limits. Because ATR is measured in price units, a 2-dollar ATR means something very different for a 10-dollar stock than for a 200-dollar stock. ATR also looks backward, reflecting past price movement rather than predicting future moves, and it says nothing about whether a price will rise or fall. For this reason, investors often use it alongside other tools and information rather than on its own.