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Average True Range (ATR)

Average True Range (ATR) measures a stock's typical price movement per period — a pure volatility gauge used to set stops and size positions to how much a name actually moves.

In one line: Average True Range (ATR) measures a stock's typical price movement per period — a pure volatility gauge used to set stops and size positions to how much a name actually moves.

What it is

Average True Range, developed by J. Welles Wilder, measures volatility — not direction. It averages the 'true range' (the greatest of: high minus low, or the gap from the prior close) over a lookback, commonly 14 periods. The result is a single number in the stock's own dollars: roughly how far it moves in a typical period. A high ATR means big swings; a low ATR means quiet.

How it works

ATR shines at turning volatility into concrete risk decisions:

  • Volatility-based stops: place a stop a multiple of ATR away from entry (e.g., 2× ATR), so the stop reflects the stock's normal noise instead of an arbitrary percentage.
  • Position sizing: a wider ATR means wider stops, which — through position sizing — means a smaller share count for the same dollar risk.
  • Regime read: a rising ATR signals expanding volatility; a falling ATR, calming markets.

Because ATR is in the stock's own units, it adapts automatically: a quiet name gets tight stops, a wild one gets room to breathe.

Worked example

Example

A large-cap trades at $200 with a 14-day ATR of $4 — it typically swings about $4 a day. You buy at $200 and set a stop at 2× ATR below entry: $200 − $8 = $192. That stop sits outside normal daily noise, so you're less likely to be shaken out by a routine wiggle, while still capping risk. If you risk $500 on the trade, your $8 stop distance means a position of about 62 shares. A quieter name with a $1 ATR would get a tighter $2 stop and a larger share count for the same $500 risk.

Why it matters

ATR fixes the single biggest mistake in stop placement: using a flat percentage that's too tight for volatile names and too loose for calm ones. By anchoring stops and sizing to actual volatility, ATR keeps your risk consistent across very different stocks and market regimes. Its limit is that it's purely about magnitude — it says nothing about direction — so it's a risk tool, not a signal on its own.

Entry Point Trading frames every call against how much a name actually moves, in the same spirit — then grades the outcome in the open.

Keep learning

Related concepts

Volatility and the VIX
Measuring fear and expected market swings.
Stop-Loss
A pre-planned exit that caps the loss on a trade.
Position Sizing
Deciding how much to risk on a single trade.
Bollinger Bands
Volatility bands that flag stretched and quiet markets.
Beta and Volatility
How much a stock tends to move relative to the market.
Stock Signal
A structured buy/sell/hold call — and what a good one must include.

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Common questions

FAQ

How do I use ATR to set a stop-loss?
Place your stop a multiple of ATR away from your entry — commonly 1.5× to 3× ATR. This sets the stop outside the stock's normal daily noise, so routine wiggles don't trigger it, while still capping your loss. Because ATR is in the stock's own dollars, the stop automatically adapts to each name's volatility.
Does ATR tell me which direction a stock will move?
No. ATR measures only the size of movement (volatility), not its direction. A high ATR tells you the stock swings a lot; it says nothing about up or down. Use ATR for risk decisions — stop distance and position size — and rely on trend and price tools for direction.

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