Technical analysisModule 3, lesson 17 of 32
Average true range (ATR)
How true range and ATR measure a share's typical movement, how ATR is used to compare volatility and set stop distances, and what it does not tell you.
In this lesson
- Calculate true range for a session, including gaps.
- Calculate the average true range over a period.
- Use ATR to compare volatility between shares and over time.
- Use ATR to set stop distances that fit a share's normal movement.
Builds on
- Open, high, low and closeTrue range is calculated from the high, low and previous close.
- Moving averagesATR is a moving average of true range.
On this page
In simple terms
The average true range (ATR) measures how much a share typically moves in a session. It was introduced by J. Welles Wilder, who also created RSI. A share with an ATR of ₹15 has typically moved about ₹15 from low to high, including any gap from the previous close, over recent sessions.
ATR is purely a measure of volatility. It tells you how much the price tends to move, not in which direction.
True range
The simple range of a session, high minus low, misses gaps. If a share closes at ₹500 and opens the next day at ₹520, trading between ₹515 and ₹525, the day's high-low range is only ₹10, but the share has really moved up to ₹25 from the previous close.
True range fixes this by taking the largest of three distances:
true range = the largest of: today's high − today's low today's high − yesterday's close (as a positive number) yesterday's close − today's low (as a positive number)
Average true range
ATR = average of true range over N periods (commonly 14)
Like RSI, ATR is usually smoothed after the first value, so each day adds a fraction of the new true range to the previous average.
Worked example: A five-day ATR
A made-up share, Sahyadri Cement:
| Day | High | Low | Close | True range |
|---|---|---|---|---|
| 1 | 210 | 200 | 205 | 10 (first day: high − low) |
| 2 | 214 | 204 | 212 | 10 |
| 3 | 216 | 209 | 210 | 7 |
| 4 | 209 | 198 | 201 | 12 (210 − 198, from the previous close) |
| 5 | 207 | 199 | 205 | 8 |
| Sum of true ranges | 47 |
|---|---|
| Five-day ATR: 47 ÷ 5 | ₹9.40 |
On day 4, the share fell from a previous close of ₹210 to a low of ₹198, a ₹12 move, more than the day's own range of ₹11.
Comparing volatility
Because ATR is in rupees, compare shares at different prices by dividing ATR by price:
| Share A: ATR ₹9.40 on price ₹205 | 4.6% a session |
|---|---|
| Share B: ATR ₹30 on price ₹1,500 | 2.0% a session |
Share B has the larger ATR in rupees but is less volatile in percentage terms.
ATR also shows changes in a share's own volatility: a rising ATR means sessions are becoming more active, often after news or during market stress.
Using ATR for stops and position sizes
A stop-loss placed too close to the entry price is likely to be triggered by a share's normal movement; one placed very far away risks a large loss. ATR helps match the stop distance to the share:
- A stop two times ATR below the entry allows for about two typical sessions of adverse movement.
- Position size can then be set so that the loss, if the stop is hit, is a fixed share of capital.
The stop-loss placement and position size lessons develop this. Remember that gaps can still carry the price beyond any stop.
Why it matters
ATR gives a simple, objective measure of how much a share normally moves. That makes it one of the most practical tools for risk control: setting stops that are not triggered by ordinary noise, sizing positions according to volatility, and comparing how risky different shares are day to day.
Limitations
ATR describes the past and changes as conditions change; a calm share can become volatile suddenly. It says nothing about direction. Its value depends on the period chosen, and it can be distorted by one extreme session in a short period.
Common mistakes
- Reading a rising ATR as bullish or bearish. It measures size of moves, not direction.
- Comparing rupee ATRs between shares at very different prices.
- Ignoring gaps, which can exceed several ATRs.
- Using the same fixed stop distance for every share.
Try it yourself
- Note the high, low and close of any share for six sessions from the exchange website.
- Calculate the true range for sessions 2 to 6, and their average.
- Express the ATR as a percentage of the latest close.
- Repeat for a share in a different industry and compare the two.
Key takeaways
- True range is the largest of three distances. Today's high minus low, today's high minus yesterday's close, and yesterday's close minus today's low.
- Including the previous close captures gaps, which the simple high-low range misses.
- ATR is the average of true range over a period, commonly 14. It is measured in rupees and shows a share's typical movement per session.
- ATR measures how much a share moves, not which way. It is a volatility measure, not a directional signal.
- Traders use ATR to set stop distances and position sizes that fit each share's normal movement.
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Terms used in this lesson
- Average true range
- The average over N periods of each session's true range, a measure of how much a share typically moves, including gaps.
- Volatility
- How much and how quickly a price moves up and down. Highly volatile shares swing sharply in both directions.
- Price gap
- A jump between one trade and the next with no trades in between, often between one day's close and the next day's open.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.