Glossary
Average true range (ATR)
A volatility measure averaging each bar's true range, which includes any gap from the prior close; usually over 14 periods.
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Average true range (ATR) is a volatility indicator that measures how far a security typically moves in one bar, including any gap from the previous close. J. Welles Wilder Jr. introduced it in his 1978 book New Concepts in Technical Trading Systems. ATR says nothing about direction; it tells you how big a normal move is, which is why traders use it to size positions and set stops.
How it is calculated
Each bar's true range is the largest of three distances, so overnight gaps are not ignored:
The usual setting is n = 14. The first ATR is a simple average of the first 14 true ranges; after that Wilder's smoothing applies.
How it is used
- Stops. A trader might place a stop 2 × ATR below the entry, so normal noise is less likely to trigger it.
- Position sizing. Risking a fixed dollar amount per trade, divided by a multiple of ATR, gives smaller positions in more volatile stocks.
- Regime changes. A rising ATR shows expanding volatility, common in sell-offs and around news.
ATR is in price units, so a $500 stock naturally has a larger ATR than a $20 one. To compare across stocks, divide by price, which is what normalized ATR does.