Average True Range

A volatility indicator measuring the average range between a security's high and low prices over a specified period, used to set stop-loss levels and gauge market conditions.

Average True Range (ATR) was developed by J. Welles Wilder. The "true range" for any given period is the largest of: (1) current high minus current low, (2) absolute value of current high minus previous close, (3) absolute value of current low minus previous close. This accounts for overnight gaps. The ATR is a moving average of true range over typically 14 periods.

ATR measures volatility without directional bias — it tells you how much an asset typically moves, not which direction. A stock with an ATR of $3 typically moves about $3 per day in its high-low range. A stock with an ATR of $0.50 is much calmer. Crucially, ATR changes over time: volatility clusters, meaning high ATR periods tend to follow other high ATR periods, and low volatility environments tend to persist.

ATR has several practical applications. For stop-loss placement, many traders set stops at 1.5× or 2× ATR below the entry price — far enough away that normal daily noise won't stop them out, but still defining a clear loss limit. For position sizing, ATR-based sizing ensures consistent dollar risk per trade regardless of which instrument is being traded. ATR can also identify volatility squeezes: when ATR drops to unusually low levels, a significant move is often approaching.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.