ATR (Average True Range) measures market volatility. It tells you how much a security typically moves in a given period — a critical input for sizing positions and placing stop losses that account for current volatility rather than arbitrary fixed amounts.
What ATR Measures
ATR is the average of the "true range" over N periods (typically 14). True range is the greatest of: current high minus current low, absolute value of current high minus previous close, absolute value of current low minus previous close. The second and third options capture gap moves that high-minus-low alone would miss. ATR is reported in the price units of the security — for a stock trading at $100, ATR of $2.50 means the stock typically moves $2.50 per period. As volatility rises, ATR rises; as volatility compresses, ATR falls.
Calculating ATR Step by Step
For a 14-period ATR on daily bars: (1) Compute true range for each of the last 14 days. (2) Simple average for the first ATR value. (3) Subsequent ATR values use Wilder's smoothing: ATR_today = ((ATR_yesterday × 13) + TR_today) / 14. Wilder's smoothing weighted-averages the previous ATR with today's true range, producing smoother values than a simple moving average. Most charting platforms (TradingView, ThinkOrSwim, MetaTrader) compute ATR automatically — you typically don't need to calculate it manually.
Position Sizing with ATR
The standard approach: risk a fixed percentage of account per trade (typically 1-2%), with the stop loss placed at a multiple of ATR away from entry. Position size = (account × risk %) / (ATR × stop multiple). Example: $50,000 account, 1% risk per trade, stock at $100 with ATR $2.50, stop placed at 2× ATR ($5) below entry. Risk per share = $5. Risk dollars = $500. Position size = $500 / $5 = 100 shares. Compare to a fixed-dollar stop of $5 regardless of volatility — that approach gets stopped out frequently in volatile securities and sizes too small in calm securities. ATR-based sizing adapts to current conditions.
Stop Loss Placement with ATR
Common multiples: 1× ATR (tight stop, frequent stop-outs, lower risk per trade), 2× ATR (standard for swing trading), 3× ATR (looser stop, larger moves required to exit, used for longer holds). Tighter stops require higher win rates to be profitable; looser stops give trades more room but increase risk per trade. Backtest your strategy with different ATR multiples to find the right balance. ATR-based stops also work for trailing stops — adjust your stop upward by 1× ATR for each new high in the position (Chandelier Exit, a popular trailing stop method based on ATR).
ATR in Volatility-Based Strategies
Some strategies trade volatility expansion directly. ATR breakout: enter long when price exceeds previous bar's close + 1× ATR (suggests strong upside momentum); short when price falls below close - 1× ATR. Volatility regime classification: classify market as "low ATR" (compression, often precedes breakouts) vs "high ATR" (trending or news-driven) and adapt strategy. Some traders use ATR percentile rank (where current ATR ranks vs last 252 days) to time entries — extreme low ATR often precedes volatility expansion.
Common Mistakes
Using ATR alone for direction — ATR measures magnitude, not direction. Combine with trend indicators. Fixed stop multiples in all market conditions — adjust to match strategy time horizon. Ignoring after-hours and overnight gaps — ATR captures these in the true range calculation, but some traders disregard them and underestimate volatility. Setting position size based on stop dollars without confirming the dollar risk is acceptable for your account size. Always calculate the worst-case loss before entering.
How Charted Helps
Snap a screenshot of any chart and Charted identifies the current ATR, computes position sizing for your account and risk parameters, and suggests stop loss placement at ATR multiples. The app also identifies volatility regime (low/normal/high) to inform whether to trade breakouts or fades. This content is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.