Average True Range (ATR)

ATR measures how much a stock’s price moves on a typical day. It captures the full range of daily movement, including any gap between yesterday’s close and today’s open. A higher ATR means the stock moves more in either direction day to day. The standard period is 14 days.

ATR is measured in dollars (or whatever currency the stock trades in), not percentages. A stock with an ATR of $3 moves about $3 per day on average. Whether that is a lot depends on the stock’s price — $3 is significant for a $20 stock but not for a $500 one.

ATR tells you nothing about direction. A stock can have a high ATR while going up, down, or sideways. It only measures how much movement there is, not which way.

Rising ATR means volatility is increasing — the stock is making bigger moves day to day. Falling ATR means it is settling down. ATR often rises at the start of a major move (up or down) and gradually falls as the move matures.

ATR is used most often for position sizing and stop-loss placement rather than entry signals. If a stock has an ATR of $3 and you set your stop loss $1 away, you are likely to get stopped out by normal daily noise. A common rule is to set stops at 1.5x to 2x the ATR away from your entry point.

For position sizing, ATR helps you equalize risk across different stocks. If stock A has twice the ATR of stock B, you buy half as many shares of stock A so both positions carry roughly the same dollar risk.