Average True Range (ATR)
How much does a candle move on average? ATR doesn't judge direction, only volatility, and it's most often used to set stops.
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Text version · Volume & Volatility Indicators, lesson 5: “Average True Range (ATR)”
How much does a candle move on average? ATR doesn't judge direction, only volatility, and it's most often used to set stops.
True range: the biggest of three distances
true range is the biggest of "high − low," "high − previous close" and "previous close − low," so gaps get counted too. ATR is its average; it only measures volatility, not direction.
Let your stop follow volatility
A common stop-loss: entry − 2 × ATR. In calm markets the stop sits close; when volatility picks up it widens automatically, so normal up-and-down swings are less likely to "shake you out."
ATR can also decide how much to buy
Put the stop 2 × ATR away, then divide a fixed risk amount by that distance to get the share count: the bigger the volatility, the fewer shares you buy, and the cap on each loss stays the same. That's the heart of position sizing.
Key takeaways
- True range = the largest of high − low, |high − previous close| and |low − previous close|, so gaps count too. ATR is usually a smoothed average over 14 candles.
- The bigger the ATR, the more volatile the market. It's measured in price units and doesn't judge direction.
- A common stop: entry − 2 × ATR, so the stop distance adjusts automatically with volatility.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click "Example: entry $100 · ATR $2 · 2×": where does the stop land? Then drag the multiplier to 3: what's the stop now?
- Hover over a few candles with gaps: of the three true-range distances, which one wins?
- In "Calm → crash," play into the crash: how far did ATR rise? How did the stop distance and the "Shares for $1,000 risk" change?
- Drag the multiplier from 1 to 4: with a stop that's too tight and one that's too loose, where does this long trade exit in each case?
Quiz and explanations
- 1. ATR rises from $1 to $3. What does that mean?
- Answer: Volatility has picked up noticeably.ATR only measures the size of the moves.
- 2. You enter at $100 with ATR = $2 and use a 2x ATR stop. Where does the stop go?
- Answer: $96.$100 − 2 × $2 = $96.
- 3. Yesterday closed at $50, and today gapped up with a high of $56 and a low of $54. What's today's true range?
- Answer: $6.Take the largest of the three: high − low = $2, high − previous close = $6, low − previous close = $4. So it's $6.
Terms in this lesson
- ATR (Average True Range): Average true range: the average size of each candle's move, regardless of direction.
- position sizing (Position Sizing): Deciding how much to buy on each trade based on how much risk you can take.
- stop-loss (Stop Loss): Automatically closes a position when price moves against you to a preset level, capping your maximum loss.
- true range (True Range): The largest gap among today's high, today's low and yesterday's close.