Average True Range (ATR)

The Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder Jr. in 1978. Unlike simple range calculations, the ATR accounts for gaps between trading sessions by using the "True Range" — the greatest 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. The ATR is then calculated as a moving average (typically 14 periods) of these True Range values. The ATR does not indicate price direction — only the degree of price volatility. A high ATR indicates high volatility (large price swings), while a low ATR indicates low volatility (tight price ranges). Traders use the ATR in several practical ways: for position sizing (risking a fixed percentage of capital based on ATR to normalize risk across different securities), for setting stop-loss levels (e.g., placing stops 2x ATR below the entry price to account for normal price fluctuations), for identifying volatility expansions that may signal the beginning of a new trend, and for comparing volatility across different securities or timeframes. The ATR is particularly valuable because it adapts to changing market conditions — expanding during volatile periods and contracting during calm ones.