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What is Average True Range (ATR)?

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The Daily Ledger · Markets

The shares fell $9 on the day, more than three times their average true range, as traders reacted to the guidance cut.

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Overview

Average true range, or ATR, is how far a stock's price usually travels in a day, in dollars. Each day's travel is the largest of three distances: today's high to today's low, yesterday's close to today's high, or yesterday's close to today's low. The ATR is the average of that figure over recent days, usually the last 14. Say a $100 stock has an ATR of $2. On a typical day it moves about $2. A $1 move is an ordinary day. A $6 move is three ATRs, which is $6 divided by $2, and that is news. The ATR has no direction: up $2 and down $2 count the same. What it gives you is a scale, so that every move can be read as ordinary or large for this stock.
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Overview

ATR, short for average true range, is a stock's normal daily travel, measured in dollars. For each day you take the biggest of three gaps: today's high to today's low, last night's close to today's high, or last night's close to today's low. Then you average the last 14 days. A $40 stock with an ATR of $1.20 tends to shift about $1.20 a day, which is 3% of its price. A 50-cent move is nothing. A $3.60 move is three days' travel in one, since $3.60 is three times $1.20. Which way it went isn't in the number. The ATR just tells you what counts as a big day for this particular stock. 😎

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Detail

Average true range, or ATR, is how far a stock's price usually travels in a day, in dollars. The word "true" is there because a stock can jump overnight, and a plain high-to-low range would miss the jump. Take one day. The stock closed yesterday at $50. Today it opened higher and ranged between a low of $51 and a high of $53. Inside the day it moved $2, which is $53 less $51. From yesterday's close it moved $3, which is $53 less $50. The third distance, from yesterday's close down to today's low, is $1 the other way. The largest of the three is $3, so $3 is today's true range. Do that for each of the last 14 days, the usual setting, and average the results. Say the average comes to $2.40. That is the ATR, and it is the scale for everything else. A stop-loss is an instruction to sell if the price falls to a level you name. A stop $1 below the price sits inside one day's ordinary travel, so ordinary wobble will reach it. Traders often set a stop at a multiple of the ATR instead, such as two, which here is $4.80. How many ATRs is a judgement. Two things the ATR does not tell you. It has no direction: a stock rising $2.40 a day and one falling $2.40 a day have the same ATR. It is also in dollars, so it does not compare across stocks. Here $2.40 on $50 is 4.8% a day; divide by the price before comparing two stocks. Fourteen days is a convention; fewer days react faster to a change in mood, more days are steadier. And the ATR is an average of past days, so a surprise, such as an earnings report, moves the price further than it allows for. The ATR is the ruler, not the forecast.
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Detail

ATR, short for average true range, is a stock's normal daily travel, measured in dollars. It's called "true" because the overnight jump counts, not just what happened while the market was open. One day as an example. The stock finished at $20 last night. This morning it jumped and spent the session between $21.70 and $22.10. Within the session it moved 40 cents, which is $22.10 minus $21.70. From last night's finish it moved $2.10, which is $22.10 minus $20. The biggest of the gaps wins, so today's true range is $2.10. Do the same for the previous 14 days and take the average; call it 80 cents. That 80 cents is the ATR, and you read every move against it. A sell order parked 30 cents under the price is within the wobble: an ordinary day reaches it. So traders tend to park it a couple of ATRs away, and two of them here is $1.60. How many is a call you make, not a law. Two blind spots. The ATR has no opinion on direction: a dollar up and a dollar down are the same number to it. And it's in dollars, which sets a trap. Here 80 cents on $20 is 4% a day, while a $200 stock with a $4 ATR shifts 2% a day, calmer despite the bigger number, so turn both into percentages before you line two stocks up. Fourteen days is the usual choice; fewer days twitch, more days settle. One more thing: it's built from the days already gone, and an earnings shock laughs at the days already gone. The ATR measures the wobble; it doesn't see the shock coming. 😎

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Analogy

Average true range, or ATR, is how far a stock's price usually travels in a day, in dollars, averaged over recent days. Your commute measures the same kind of thing. The trip takes about 35 minutes, and on an ordinary day it lands anywhere from 30 to 45. That 15-minute spread is the normal travel. A 42-minute day is nothing, because it sits inside the spread. A 90-minute day is an incident, because it sits far outside it. The spread is the ATR. A day inside it is wobble, a day far outside it is news. And the spread has no direction: a fast day and a slow day are both inside it, and the number cannot say which kind you had. Where the picture breaks: a commute gives one number a day, while a stock gives a high, a low and last night's close, and the ATR takes the widest distance among them.
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Analogy

ATR, short for average true range, is a stock's usual daily travel in dollars, worked out from the last couple of weeks. A sleep tracker does the same job for your nights. You tend to get 7 hours, give or take 45 minutes. A 6½-hour night is no big deal, because it falls within the give-or-take. A 4-hour night is a story, because it's miles beyond it. That give-or-take is the ATR. A night within it is wobble, a night well beyond it is news. And it has no direction: more sleep and less sleep both count as within, and the number can't tell you which you got. Being within the give-or-take only means the night was typical for you, not that it was a good one. Where it falls short: the tracker logs one night at a time, while the ATR also counts the jump from last night's close to today's prices. 😎
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Formal definition β€” The same term, explained the usual way

Average true range (ATR) is a non-directional volatility indicator introduced by J. Welles Wilder Jr. in 1978. It is computed as a smoothed moving average, conventionally over a 14-period look-back, of the true range, where the true range for a period is the greatest of: the current high minus the current low; the absolute value of the current high minus the previous close; and the absolute value of the current low minus the previous close. The inclusion of the previous close captures gaps between sessions. ATR is expressed in price units rather than as a percentage, so cross-instrument comparison requires normalisation by price, and because it is derived from price differences it is unaffected by back-adjusted price series. It is widely used for stop placement and position sizing as a multiple of ATR, and as a measure of trend strength, but it carries no information about price direction.

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