What is Average True Range (ATR)?
Average True Range is a volatility indicator that measures the average range between the high and low price over a set period (typically 14 days), accounting for gaps in price.
Average True Range (ATR) Explained
ATR is one of the most practical technical indicators for risk management. It tells you how much a stock typically moves in a day, which helps set appropriate stop losses and position sizes. A stock with an ATR of $5 moves about $5 per day on average — setting a $1 stop loss would likely get hit by normal noise, while a $10 stop loss gives the trade room to breathe.
Real-World Example
A stock priced at $100 has a 14-day ATR of $3.50. A trader using a 2x ATR stop would set their stop loss $7 below entry ($93). This ensures the stop is outside normal daily volatility while still limiting risk to a defined amount.
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