What Is Average True Range ATR: Formula, How to Calculate, and How to Use It

You can use the ATRP to compare related instruments and then choose the one with the least volatility or the level of volatility you want. The indicator allows you to do that because it measures volatility as a percentage of the security’s price, rather than give an absolute value. The ATRP is a variation of the ATR and is available in StockChartsACP. ATRP measures volatility, similar to the Average True Range (ATR), but there’s a difference. ATRP is scaled as a percentage, which means you can use it to compare ATR values of different securities. The ATRP is calculated by dividing the ATR by the closing price and multiplying the value by 100.

Even so, the remnants of these first two calculations “linger” to slightly affect subsequent ATR values. Spreadsheet values for a small subset of data may not match exactly with what is seen on the price chart. On our charts, we calculate back at least 250 periods (typically much further) to ensure a much greater degree of accuracy for our ATR values. For example, the Bollinger Bands indicator also measures volatility.

Normalized ATR: Two Ways of Expressing ATR as Percentage

• As the stock price is significantly higher than the average, there is a high possibility that the price will fall.
• The possibilities for this versatile tool are limitless, as are the profit opportunities for the creative trader.
• Doing so requires using a formula to calculate a position size.
• However, the best ATR settings will depend on your strategy, the time frame you are using, and the asset you are trading.

When reversing from short to long, the stop and reverse point is one ARC above the lowest close. When reversing a position from long to short, a trader waits for a security to close at one ARC below the highest close since they purchased the shares. In any case, a trader might want to investigate why a security has an unusually high ATR before they buy or sell.

• IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority.
• Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses.
• The ATR indicator operates by looking back on past candlesticks or bars, and then calculating the average of its true ranges.
• ATR is unique in that it is not concerned with the direction of a stock’s movement, but rather how significant that movement is, helping to spot momentum early.
• But, if math had morals, the moral of the equation is that you shouldn’t rely on short ranges.

What is a good ATRP value for different markets?

It can also be used for position sizing, with the ATR used to find which assets in a traders portfolio are the most volatile and with the size of trades adjusted accordingly. Let’s now take a quick look at a real world example average true range percent of the average true range. The indicator is available on most trading platforms and will show up as a separate panel below the price chart.

The lower the constant is, the less effective the ARC will be at keeping a trade open and profitable. Rather than panic trade because your robo-advisor tells you to buy or sell a highly volatile security, take a breath and learn how to use ATR to your advantage. Average true range (ATR) can turn volatility from a roller-coaster ride, into a sunny, calm walk on the beach. Copyright © 2025 FactSet Research Systems Inc.Copyright © 2025, American Bankers Association.

CFD Trading vs Spread Betting Explained

When price movements are small, the indicator’s value falls, showing that the market volatility is low. For example, let’s say you have a risk management plan to only risk 1% of your account size per trade. When the volatility is high and your ATRP-based stop loss becomes wider, it forces you to trade a smaller position size. Conversely, when volatility is low and your ATRP-based stop loss becomes tighter, your position size becomes correspondingly bigger. Some traders, especially active day traders, like markets with higher volatility like the crypto market and penny stocks, while others like blue-chip stocks with lower volatility.

Similar to the ATR indicator, it measures the average of the true ranges over a given period, but rather than use the absolute value, it expresses it as a percentage of a bar’s closing price. The ATRP is obtained by dividing the ATR by the asset’s closing price and then multiplying the result by 100. Second, ATR only measures volatility and not the direction of an asset’s price. This can sometimes result in mixed signals, particularly when markets are experiencing pivots or when trends are at turning points.

ATR Trailing Stops #

To set a stop loss that’s 2 times the ATR, you would set it $4 below the current price, or at $96. This gives the stock enough room to move in its normal range without hitting your stop loss, while still protecting you from a significant adverse move. ATR values are read by looking at the numerical output of the ATR indicator on a chart. Higher ATR values indicate increased volatility, meaning larger price movements within a given period. Conversely, lower ATR values indicate lower volatility and smaller price movements. Successful trading not only involves finding good entry points but also managing risk effectively.

How Do You Read ATR Values?

Average True Range (ATR) is a technical indicator developed by J. The average true range (ATR) is a technical indicator that tells you the volatility of a stock on average over a given period. It doesn’t convey the direction of the stock’s price, but just how much the price has moved. It helps traders avoid low-volatility environments (more volatility means better chances for profits), set stop losses, and avoid false breakouts.

ATR can be used in various trading strategies including day trading, range trading, momentum trading, working with a breakout strategy, and many more. Compared to Bollinger Bands, which are calculated using volatility, price levels, and moving averages, ATR offers a purer measure of volatility. Bollinger Bands show where prices sit relative to recent ranges, whereas ATR focuses solely on the magnitude of price movements. Volatility can shake you out of a position prematurely or cause you to risk too much in a quiet market.

Mastering risk management with the Average True Range

For example, a 14-day ATR would calculate the average True Range over the past 14 days. This gives a measure of volatility that smooths out single-day spikes and troughs, providing a more consistent and reliable measure of market volatility. By understanding the average range of price movements within a trading day, day traders can make more informed decisions about entry and exit points. The Average True Range (ATR) is a technical analysis indicator used to measure volatility in financial markets. Welles Wilder Jr., this indicator is particularly useful in volatile markets such as Forex, commodities, and stock CFDs to determine the strength and level of price fluctuations. Incorporating the Average True Range (ATR) indicator into your trading strategy can significantly enhance your risk management practices.

Enter Profitable Territory With Average True Range

Futures, futures options, and forex trading services provided by Charles Schwab Futures & Forex LLC. This approach accommodates volatility, allowing the stock to fluctuate within a reasonable range without triggering the stop-loss unnecessarily. This value reflects the average volatility of the stock over the specified ATR period. This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice.

In order words, the ATRP shows how much, in percentage, an asset is likely to move from its current price in either direction. The ATR works best with indicators that provide a general trend direction, or even predict when the price is about to reverse. As the ATR itself is non-directional, using a trend indicator can help round out this weakness, and provide stronger clarity on where the market may be going. At the initial breakout, we see a successful candle close above the triangle pattern. Although this by itself gives us a clear entry signal, we can see how the price aggressively dumped back into the triangle pattern. The ATR on the other hand, would have provided clues that this was a false breakout, because the ATR remained flat.