ATR: the Average True Range

The Average True Range (ATR) is a measure of volatility: how far a stock, index or commodity typically moves in one bar (one day on a daily chart, fifteen minutes on a 15-minute chart). It was designed by J. Welles Wilder, who also gave us RSI and ADX. ATR does not tell you whether the price will go up or down. It only tells you how big the swings are, which is exactly what you need to know before you decide where to put a stop loss or how many shares to buy.

A stock with an ATR of ₹40 moves about ₹40 between its high and low on a normal day. If you place a stop loss ₹10 below your entry, ordinary noise will hit it. If you place it ₹80 below, you are giving the trade room for two normal days of movement. That simple idea is why ATR is one of the most practical indicators on any chart.

What "true range" means

The plain range of a day is its high minus its low. Wilder noticed that this misses gaps: if a stock closes at ₹1,500, opens next morning at ₹1,550 and trades between ₹1,545 and ₹1,560, the day's range is only ₹15, but the stock really moved ₹60 from where holders last saw it. The true range fixes this by taking the largest of three numbers:

• Today's high minus today's low.
• Today's high minus yesterday's close (catches gap ups).
• Yesterday's close minus today's low (catches gap downs).

True range = the largest of (high − low), (high − previous close), (previous close − low)

The ATR is then an average of the true range over the last 14 bars (14 is the usual setting). Wilder used a smoothed average: each new ATR is 13 parts yesterday's ATR plus 1 part today's true range, divided by 14. This makes ATR move gradually rather than jumping with every unusual day.

ATR today = (ATR yesterday × 13 + true range today) ÷ 14

A worked example with rupee numbers

Take a stock that closed yesterday at ₹1,500 and has a 14-day ATR of ₹30.

On the normal day the high minus low (₹40) is the largest of the three, so the true range is ₹40. On the gap-up day the high minus the previous close (₹60) is the largest, so the true range is ₹60, four times the plain range of ₹15. If the gap-up day comes next, the new ATR is (30 × 13 + 60) ÷ 14 = ₹32.14. One big day nudges ATR up; a run of big days lifts it steadily.

To compare different stocks, turn ATR into a percentage of price. An ATR of ₹30 on a ₹1,500 stock is 2%. An ATR of ₹12 on a ₹300 stock is 4%: the cheaper stock is actually twice as jumpy. The screener shows both ATR and ATR % for every NSE stock, so you can sort by how volatile stocks are.

ATR inside a live indicator

You may already be watching ATR without knowing it. The Supertrend line is drawn a fixed number of ATRs away from the price (the common setting is a 10-bar ATR times 3). Here are today's readings for Infosys, including its Supertrend level:

Look at the gap between the price and the Supertrend line. That gap is about three times the stock's recent ATR, so when volatility rises the line moves further away, and when the stock calms down it hugs the price more closely. The full ATR value is on the stock's technicals page through the link in the box. The Supertrend guide explains the line itself.

Using ATR for stop losses

The most common use of ATR is to set a stop loss that respects how the instrument normally moves. A popular rule is to place the stop 1.5 to 3 ATRs from the entry. Using the example above, a buyer at ₹1,500 with an ATR of ₹32 and a 2 × ATR stop would place it at ₹1,436. A seller (short) would place it at ₹1,564.

• Tighter (1 ATR): smaller losses, but more trades stopped out by normal noise.
• Wider (3 ATR): fewer false stop-outs, but each loss is bigger, so you must buy fewer shares.
• Trailing ATR stop: after the price rises, move the stop up to the highest close minus 2 or 3 ATR. It never moves down. This is often called a chandelier stop.

No multiple is correct for every stock. A stop that is too tight for a volatile metal stock may be too loose for a quiet FMCG stock. Testing the rule on past data in the backtester is a better guide than any fixed number. The stop loss guide covers the order types that carry out the stop.

Using ATR for position size

ATR also answers "how many shares should I buy?" Decide first how many rupees you are willing to lose on one trade, then divide by the distance to your stop.

Shares = rupees at risk ÷ (ATR multiple × ATR)

If you risk ₹5,000 per trade and your stop is 2 × ₹32 = ₹64 away, you buy 78 shares (₹5,000 ÷ ₹64). On a calmer stock with an ATR of ₹10 and the same 2 × ATR stop, you could buy 250 shares for the same ₹5,000 risk. This keeps every trade equally important to your account, whatever the stock. The position sizing guide goes deeper.

Reading ATR on an index

ATR works on NIFTY and BANKNIFTY too. If NIFTY's 14-day ATR were 220 points, a day with a 450-point range would be about twice normal. Option traders compare this with the at-the-money straddle: if the straddle prices a move much larger than the recent ATR, options are pricing in more movement than the index has been delivering, and the reverse when the straddle is small. ATR looks back; the straddle and India VIX look forward. Using both gives you a sense of whether the market expects tomorrow to be calmer or wilder than last week.

Limits and common mistakes

• ATR is not direction. A rising ATR can come with a crash as easily as with a rally.
• Comparing rupee ATR across stocks. Always use ATR % for comparisons.
• Forgetting gaps. A stop placed by ATR can still be jumped over by a gap on results or news; the order then fills at a worse price.
• Using a 14-day ATR right after an event. One huge results day keeps ATR high for weeks. Look at what the stock is doing now, not only the average.
• Mixing timeframes. A daily ATR stop on a 5-minute trade is far too wide; use the ATR of the chart you are trading on.

ATR pairs well with Bollinger Bands (another volatility measure, based on standard deviation) and with the ADX, which tells you whether the movement is going anywhere.