Definition
ATR measures market volatility by calculating the average of true ranges over a period (typically 14 days). True Range is the greatest of: current high minus low, absolute value of high minus previous close, or absolute value of low minus previous close.
Formula
Example
If a stock typically moves $2 per day (ATR=$2), a stop loss might be set at 2×ATR ($4) below entry. Higher ATR means more volatile markets requiring wider stops.
FAQ
What is Average True Range (ATR)?
A volatility indicator measuring the average range of price movement.
How do you calculate Average True Range (ATR)?
A common formula for Average True Range (ATR) is: True Range = Max[(High - Low), |High - Previous Close|, |Low - Previous Close|]
Why is Average True Range (ATR) important?
Average True Range (ATR) helps investors evaluate technical analysis and make more informed decisions.
Related Terms
Volatility
A measure of how much a stock's price fluctuates over time.
Standard Deviation
A statistical measure of how dispersed returns are around the average.
Bollinger Bands
Volatility bands placed above and below a moving average.
Position Sizing
Determining how many shares or contracts to trade based on risk parameters.