ATR (Average True Range)
Average True Range, or ATR, is a volatility indicator developed by J. Welles Wilder. It measures the average range a stock moves over a recent period, accounting for gaps between sessions. ATR does not tell you direction — it tells you how much a stock typically moves in a day. Every disciplined Indian trader uses ATR to size positions and set stop losses.
Key takeaways:
- ATR measures average daily price range, capturing both intraday and overnight moves.
- It does not indicate trend direction — only volatility.
- Default period is 14; shorter for intraday, longer for positional trading.
- Used widely for stop-loss placement and position sizing.
- Rising ATR signals expanding volatility; falling ATR signals consolidation.
How ATR is calculated
For each period, the True Range (TR) is the largest of:
- Current high minus current low
- Absolute value of current high minus previous close
- Absolute value of current low minus previous close
ATR is a 14-period exponential average of TR values. The previous close component ensures gap moves between sessions are captured.
Why ATR matters for position sizing
Suppose you have ₹1 lakh and want to risk no more than 1% per trade (₹1,000). Reliance has an ATR of ₹40. If you place a stop loss two ATRs away (₹80), you can buy ₹1,000 / ₹80 = 12 shares without exceeding your risk. ATR-based position sizing helps adapt to each stock’s natural volatility instead of forcing fixed rupee stops on stocks that move very differently.
ATR-based stop losses
Two common methods:
- Static ATR stop: Place the stop at entry ± 2 × ATR.
- Chandelier exit: Trailing stop set at the highest high (or lowest low) minus 3 × ATR.
Both methods adjust to volatility — wider stops in choppy stocks, tighter stops in calm ones.
Reading ATR for setups
- ATR squeeze: Falling ATR over many sessions = volatility contraction; often precedes a breakout.
- ATR spike: Sudden rise = volatility expansion; can signal news, results, or trend acceleration.
- ATR divergence: New price high without ATR rising = trend losing energy.
ATR values across instruments (rough guide)
| Instrument | Typical daily ATR |
|---|---|
| Nifty 50 | 100–200 points |
| Bank Nifty | 300–600 points |
| Liquid large-cap stocks | 1–3% of price |
| Mid-cap stocks | 2–5% of price |
| Highly volatile small-caps | 5%+ |
Limitations and best practices
- ATR is non-directional — never use it alone for entries.
- Adjust period to your time frame: 14 for daily, 5–7 for intraday, 21+ for weekly.
- Reset ATR after major corporate actions like splits or bonus issues; old values may distort the calculation.
- Compare ATR percent (ATR ÷ price) across stocks to compare relative volatility fairly.
Frequently asked questions
How is ATR different from standard deviation?
Standard deviation measures dispersion around a mean; ATR measures average range and considers gaps explicitly. ATR is more intuitive for stop-loss placement.
Can I use ATR on options?
Yes, on the option premium. But option-pricing dynamics differ; many traders prefer using ATR on the underlying.
Does ATR work for crypto?
Yes. ATR is generic and applies to any time-series of prices.
Is a higher ATR always bad?
No. Higher ATR means larger possible moves — good if you can size correctly and use wider stops.
