Glossary term
Average True Range (ATR)
Average true range is a technical indicator that measures how much a security has been moving, without predicting direction.
Updated
Read time
What Is Average True Range?
Average true range, or ATR, is a technical analysis indicator that measures price movement over a chosen period. It is commonly used as a volatility measure. ATR does not say whether a security is likely to rise or fall; it describes how much the price has been moving.
ATR was developed for markets where gaps between sessions can matter. Instead of looking only at the difference between a day's high and low, true range also considers gaps from the previous close.
Key Takeaways
- ATR measures volatility, not direction.
- It is based on true range, which accounts for intraday range and gaps from the prior close.
- Traders may use ATR for position sizing, stop placement, or comparing volatility across time.
- A higher ATR means larger recent price movement in dollar or point terms.
- ATR should not be used alone as a buy or sell signal.
How Average True Range Works
True range is the largest of three values: the current high minus the current low, the absolute value of the current high minus the previous close, or the absolute value of the current low minus the previous close. ATR then averages true range values over a selected number of periods, often 14.
Because ATR is measured in price units, it is easier to compare the same security over time than to compare two securities with very different prices. A $5 ATR means something different for a $30 stock than for a $500 stock.
ATR Formula Components
Component | What it captures | Why it matters |
|---|---|---|
High minus low | Intraday trading range | Shows movement during the session |
High minus previous close | Upside gap or extension | Captures overnight or between-session change |
Low minus previous close | Downside gap or extension | Captures downside movement from the prior close |
Average period | Number of periods used | Controls how quickly ATR reacts to new volatility |
Why Traders Use ATR
ATR can help traders avoid treating every security the same. A stop that is reasonable for a quiet stock may be too tight for a volatile one. A position size that is manageable in a low-ATR market may be too large when daily ranges expand.
Some traders also watch changes in ATR. Rising ATR can indicate that the market is becoming more volatile. Falling ATR can indicate that ranges are compressing. Neither condition predicts direction by itself, but both can affect risk management.
Limits and Misunderstandings
ATR is backward-looking. It describes recent or historical movement; it does not know what volatility will be tomorrow. News, earnings, liquidity shocks, or broad market events can change volatility quickly.
ATR also does not measure value. A high ATR does not mean a security is attractive, and a low ATR does not mean it is safe. It is one input for trade planning and risk control, not a substitute for research.
The Bottom Line
Average true range measures how much a security has been moving by averaging true range values. It can help with volatility awareness and risk management, but it does not forecast price direction or replace a full investment process.