What is Average True Range (ATR)? Definition, Formula, and Example
Average True Range (ATR) is a volatility indicator that measures the average price range of an asset over a set period, quantifying how much it moves each session regardless of direction.
What is Average True Range (ATR)?
Average True Range is a volatility indicator developed by J. Welles Wilder Jr. in his 1978 book *New Concepts in Technical Trading Systems*. It measures how much an asset's price moves per session on average — including overnight gaps — expressed in dollar or point terms. ATR contains zero directional information. It answers only one question: how wide are recent price swings?
How ATR is Calculated
ATR is a smoothed average of the True Range (TR) over a lookback period (default: 14 sessions).
True Range is the largest of three values:
- Current High − Current Low
- |Current High − Previous Close|
- |Current Low − Previous Close|
The second and third components capture gap opens — a session that gaps up $5 but has a tight intraday range is genuinely volatile, and TR reflects that.
Wilder's Smoothing:
ATR(t) = [(ATR(t−1) × 13) + TR(t)] / 14
This is a 14-period exponential average with a smoothing factor of 1/14, making ATR slower to react than a simple moving average.
Worked Example: AAPL
Assume AAPL's 13-session ATR is $4.20. On April 18, 2026:
- High: $197.80
- Low: $192.30
- Previous Close: $194.10
TR = max(197.80 − 192.30, |197.80 − 194.10|, |192.30 − 194.10|)
TR = max(5.50, 3.70, 1.80) = $5.50
New ATR = [(4.20 × 13) + 5.50] / 14 = 60.10 / 14 = $4.29
Today's wider range nudged ATR up by $0.09. With ATR at $4.29, a trader risking 1% of a $100,000 account ($1,000) and placing a 1.5× ATR stop ($6.44 below entry) buys 155 shares.
When Traders Use ATR
ATR drives three practical decisions. First, stop placement: setting stops at 1.5–2× ATR below entry avoids getting stopped out by routine intraday noise. Fixed-dollar stops ignore whether a stock normally moves $1 or $10 per day. Second, position sizing: ATR-normalized sizing keeps risk consistent across different volatility regimes (the "Van Tharp unit" approach). Third, breakout confirmation: a breakout accompanied by an ATR expansion signals genuine participation rather than a low-volume drift through resistance.
Limitations and Misconceptions
ATR shows magnitude, not direction. A rising ATR during a downtrend is not a bottoming signal — it's just high volatility. Wilder's smoothing also makes ATR slow: a single spike day takes approximately 14 sessions to wash out of the average. For cross-asset comparison, raw ATR is meaningless — a $4 daily range on a $20 stock (20% ATR) is nothing like a $4 range on a $200 stock (2% ATR). Use percentage ATR (ATR ÷ Close) for comparisons.