Technical Analysis
ATR — Average True Range: The Trader's Volatility Tool
ATR measures market volatility in price terms, not percentages. It's the backbone of intelligent stop placement, position sizing, and trade management.
Key rules
- ATR measures real price movement volatility, not percentage moves — use it for stop placement
- Set stops at 1.5–2× ATR from entry to avoid normal market noise stopping you out
- Size positions using: Risk $ ÷ ATR stop distance = shares/lots/units
- ATR trailing stops (e.g. 3× ATR) let winners run while adapting to changing volatility
- Compare ATR across timeframes: a daily ATR of $5 means the stock moves $5 on average — know this before entry
The Average True Range (ATR) was developed by J. Welles Wilder and published in 1978. It measures the average range of price movement over a given period — typically 14 bars. Unlike percentage-based volatility measures, ATR speaks in the same units as price, making it immediately usable for practical trade decisions.
True Range (TR) is the largest of three values: current high minus current low; the absolute value of current high minus prior close; the absolute value of current low minus prior close. This captures gap moves that a simple high-low range would miss. ATR is the smoothed average of true range over the lookback period.
Stop Loss Placement is where ATR earns its keep. A mechanical rule: set your stop 1.5–2x ATR from entry. This ensures your stop is outside normal market noise — you won't get stopped out by routine price fluctuation, only by a genuine move against your thesis. A 14-period ATR on a daily chart for a stock trading at $100 might read $2.50. Placing a stop 2x ATR away means a $5 stop, which reflects that stock's typical daily movement range.
Position Sizing with ATR: if you risk 1% of a $10,000 account ($100) and the ATR-based stop is $5, your position size is 100/5 = 20 shares. This ties your position size directly to the current volatility of the instrument — automatically sizing down in volatile markets and up in calm ones. This is far superior to fixed share-count position sizing.
ATR Trailing Stops: multiply ATR by a factor (e.g. 3x) and trail below the closing price. As price advances, the stop moves up — but never down. This approach lets winning trades run while automatically adapting the stop distance to current volatility. The Chandelier Exit uses this exact methodology.