Average True Range ATR Formula, What It Means, and How to Use It

Moreover, an investor should also review historical readings of the average true range to examine the current price movements. The value of the average true range changes and generally falls during the day. Nonetheless, it provides a satisfactory approximation of the price variations and the time that will take for the movements. The average true range values are useful for entry and exit triggers. However, they should not depend only on the average true range, rather it should be used along with a strategy to determine suitable trades. The parabolic SAR, a tool designed to show market movements and suggest entry and exit points was also created by Wilder and can work with the ATR.

In the chart above, the market was in a downtrend, as shown by the blue downward trendline. The stochastic gave a hidden bearish divergence when the price rallied to the trendline and reversed. Using the ATRP for the stop, a stop loss set at 1.5 ATRP would have given a profitable trade with a risk-reward ratio of 3. If the values are falling, it means market volatility is reducing, and if the values are rising, it means the market volatility is increasing. Yes, the ATRP is suitable for all trading styles if used with the right strategy and on the right timeframe. A day trader can use it on any of the intraday timeframes for day trading, such as the hourly, 30-minute, or 15-minute timeframe, and it will perform well if the strategy is good.

ATR Divergences #

So, when comparing two stocks, one could erroneously think that the lower-priced stock has a lower volatility than the higher-priced one. Wilder originally developed the ATR for commodities, although the indicator can also be used for stocks and indices. Simply put, a stock experiencing a high level of volatility has a higher ATR, and a lower ATR indicates lower volatility for the period evaluated.

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This chart shows the stock price of Oil and Natural Gas Corporation Ltd. (ONGC) over time, along with a sub-chart depicting the Average True Range (ATR) indicator. The ATR line fluctuates up and down, signaling changes in volatility. The first annotated period shows when ATR reached peak values, indicating high volatility. As an indicator to determine your stop loss and take profit, the ATR is generally very effective especially when you give your trade room to withstand the market’s normal inhaling and exhaling. However, for the most optimal results, you may want to adjust the ATR to find which works best for the asset, time frame, and strategy you are trading.

Standard ATR Settings #

• In the majority of cases, prices are more likely to decrease when volatility is high.
• However, shorter periods like 7 or 10 can be used for more responsive, short-term trading, while longer periods like 20 or 50 can be used for a smoother, long-term perspective.
• For example, let’s say you have a risk management plan to only risk 1% of your account size per trade.
• Swing traders use expanding ATR to identify stocks transitioning into strongly trending conditions ideal for capturing swings.

The average true range can be used in a variety of trading strategies, including day trading, breakout trading, momentum trading, and more. The average true range is a tool which could, potentially, help traders when they develop a trading strategy. To illustrate how to calculate the stock average true range using a shorter time frame, let’s walk through a hypothetical example using data for a stock over three days. When the ATR contracts to unusually low levels, it’s often a signal that a significant price move is coming, as contractions often precede expansions.

Therefore, a rising value indicates increasing volatility regardless of whether prices are rising or falling. Similarly, a falling ATR indicates decreasing volatility whether prices are moving up or down. The indicator is typically calculated using daily data, but it can also be used with any time frame (like hourly, weekly, or monthly data). The table above provides a detailed breakdown of the calculations involved in determining the True Range for each period, a fundamental step in calculating the indicator’s value.

AUD/USD hits yearly highs but now faces a critical resistance level

As I mentioned in the introduction while the ATR provides an absolute measure of volatility, the ATR% gives a relative perspective by expressing the ATR as a percentage of the current price level. ATR measures how wide price movements are over a specified period (typically 14 periods). To calculate it, you first need to determine the true range for each period. This method adapts the stop-loss to the asset’s volatility, offering wider stops during volatile periods and tighter stops during calmer markets. Traders can practise setting these stop-losses using a demo account before applying them to live trades. ATR also aids in confirming valid breakouts using volatility signals.

• To illustrate how to calculate the stock average true range using a shorter time frame, let’s walk through a hypothetical example using data for a stock over three days.
• To calculate a 14-day ATR, you would first calculate the true range for each day as described above.
• When the trader decides to sell, they place a trailing stop loss order and sets the trailing stop to .72.
• The empirical evidence presented in this study strongly supports the application of ATR in a variety of market conditions.
• ZForex is at your service with competitive advantages such as tight spreads, same-day withdrawals, fully tradable bonuses, and excellent 1-on-1 client support.

Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. For example, if an asset’s ATR remains below 1 and moves within a narrow band (e.g., between 0.81 and 0.90), it suggests that the asset isn’t experiencing high levels of volatility.

How can ATRP be applied to short-term trading?

Similarly, a trader might ignore a strong sell signal if the price of a stock is near its low and has an unusually high ATR. Since it is unlikely the price will drop even further and make the average true range percent range and ATR even greater, there is a good chance the price will rise. The ATR indicator is often used in conjunction with stop-loss orders.

Average True Range stands as one of the most practical and essential technical indicators for modern trading. Its ability to quantify normal market volatility makes it indispensable for risk management, position sizing, and strategy adaptation. Unlike directional indicators that attempt to predict where prices will go, ATR focuses on how much they’re likely to move—information that’s often more reliable and actionable. No, ATR is non-directional and only measures volatility magnitude.

The first 14-day ATR value (0.56) was calculated by finding the average of the first 14 True Range values (blue cell). The spreadsheet values correspond with the yellow area on the chart below; notice how ATR surged as QQQ plunged in May with many long candlesticks. Below I will offer a step-by-step guide to creating a Python script in VS Code. This script will download some stock data, calculate the Average True Range (ATR) and ATR% for the specified period, and then plot it all together.