Average True Range (ATR)

What is Average True Range (ATR)?

Average True Range (ATR) Average True Range (ATR) is a technical volatility indicator that measures the average of the true range over a specified number of periods, typically 14 days. Developed by J. Welles Wilder in 1978, ATR captures the full extent of price movement including overnight gaps, making it more comprehensive than simple high-minus-low range calculations. How it works: The true range for any single period is the greatest of three values: 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. By including the previous close, the true range accounts for gap opens that a simple high-low range would miss. The ATR is then calculated as a moving average (typically exponential or Wilder's smoothing) of these true range values over the lookback period. For example, if AAPL has a 14-day ATR of $4.50 while trading at $190, this means the stock moves an average of $4.50 per day. An options trader might use this to set a stop loss at 2x ATR ($9.00) below their entry, ensuring the stop is placed beyond normal daily noise. A day trader might use 1x ATR as a profit target for intraday trades. When ATR expands from $4.50 to $7.00, it signals increasing volatility and potentially wider option bid-ask spreads. Options traders use ATR in several ways. It helps size positions by quantifying recent volatility in dollar terms. It provides context for expected moves: if the ATR-implied daily move is $4.50 but the options market is pricing a $6.00 expected move, implied volatility may be elevated relative to recent realized movement. ATR is also useful for setting trailing stops that adapt to the stock's actual volatility rather than using arbitrary dollar amounts. Many traders compare ATR to the options-implied expected move to gauge whether premiums are rich or cheap.