Average True Range (ATR)¶

OVERVIEW¶

Average True Range is a volatility indicator developed by J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems. It measures how much an asset's price moves per session on average — including overnight gaps — expressed in dollar or point terms. ATR contains zero directional information. It answers only one question: how wide are recent price swings?

HOW ATR IS CALCULATED¶

ATR is a smoothed average of the True Range (TR) over a lookback period (default: 14 sessions).

True Range is the largest of three values:

Component	Formula
Intraday range	Current High − Current Low
Gap-up capture	\|Current High − Previous Close\|
Gap-down capture	\|Current Low − Previous Close\|

The second and third components capture gap opens — a session that gaps up $5 but has a tight intraday range is genuinely volatile, and TR reflects that.

Wilder's Smoothing Formula:

ATR(t) = [(ATR(t−1) × 13) + TR(t)] / 14

This is a 14-period exponential average with a smoothing factor of 1/14, making ATR slower to react than a simple moving average.

WORKED EXAMPLE¶

AAPL — April 18, 2026

Assume the 13-session ATR is $4.20.

Input	Value
High	$197.80
Low	$192.30
Previous Close	$194.10

True Range calculation:

TR = max(197.80 − 192.30, |197.80 − 194.10|, |192.30 − 194.10|)
TR = max(5.50, 3.70, 1.80) = $5.50

New ATR:

ATR = [(4.20 × 13) + 5.50] / 14 = 60.10 / 14 = $4.29

Today's wider range nudged ATR up by $0.09. With ATR at $4.29, a trader risking 1% of a $100,000 account ($1,000) and placing a 1.5× ATR stop ($6.44 below entry) buys 155 shares.

WHEN TRADERS USE ATR¶

ATR drives three practical trading decisions:

Use Case	Description
Stop placement	Set stops at 1.5–2× ATR below entry to avoid noise-driven exits. Fixed-dollar stops ignore whether a stock moves $1 or $10 per day.
Position sizing	ATR-normalized sizing keeps risk consistent across different volatility regimes (Van Tharp unit approach).
Breakout confirmation	A breakout accompanied by ATR expansion signals genuine participation rather than a low-volume drift through resistance.

LIMITATIONS AND MISCONCEPTIONS¶

Limitation	Detail
No directional signal	A rising ATR during a downtrend is not a bottoming signal — it is high volatility, nothing more.
Slow to react	Wilder's smoothing means a single spike day takes approximately 14 sessions to wash out of the average.
Not cross-asset comparable	Raw ATR values are meaningless across different price levels. Use percentage ATR (ATR ÷ Close) instead.