Key Takeaways
- ATR (Average True Range) measures market volatility by calculating the average range between high and low prices over a period. This guide explains ATR calculation, ATR-based stop loss placement, position sizing using ATR, and how to interpret high vs low ATR environments.
What is ATR (Average True Range)?
Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder Jr. in 1978. It measures how much a security typically moves in a given period — its average daily range (or hourly, weekly depending on timeframe). ATR doesn't indicate direction — only how much the price moves.
How ATR is Calculated
First, the "True Range" (TR) is calculated for each period as the greatest of:
- Current High − Current Low
- |Current High − Previous Close|
- |Current Low − Previous Close|
ATR = 14-period exponential moving average of True Range (default setting)
Example: If a Nifty 50 stock has ATR of ₹50 on a daily chart, it typically moves ₹50 in a day (up or down).
ATR-Based Stop Loss Placement
ATR's most powerful use is setting dynamic, volatility-adjusted stop losses:
- Stop too tight → stopped out by normal price noise
- Stop too wide → too much risk per trade
- ATR-based stop → adjusted to the security's actual volatility
Popular ATR stop formulas:
- Long trade stop: Entry Price − (2 × ATR)
- Short trade stop: Entry Price + (2 × ATR)
Example: Stock trading at ₹500 with ATR ₹20. Long trade entry at ₹500 → Stop at ₹500 − (2 × ₹20) = ₹460.
ATR for Position Sizing
ATR helps calculate position size so that any stop loss triggers a specific rupee loss regardless of which stock you're trading:
- Account: ₹5,00,000. Risk 1% per trade = ₹5,000 risk
- Stock ATR: ₹25. Using 2× ATR stop = ₹50 risk per share
- Shares to buy: ₹5,000 / ₹50 = 100 shares
This ensures equal rupee risk across all trades regardless of stock price or volatility.
Interpreting ATR Levels
| ATR Condition | Market State | Trading Implication |
|---|---|---|
| Rising ATR | Increasing volatility | Widen stops, reduce position size |
| Falling ATR | Decreasing volatility | Breakout may be imminent (low ATR precedes big moves) |
| Very high ATR (spike) | Panic or euphoria | Exercise caution; extreme moves near exhaustion |
| Consistently low ATR | Consolidation | Squeeze pending — watch for directional break |
ATR for Intraday Trading
On intraday charts (5-min, 15-min), ATR helps:
- Set realistic profit targets (1.5–2× ATR as target)
- Determine whether a stock is "in play" (unusually high ATR = high activity)
- Know when to avoid trading (very low ATR = dull, choppy market)
