ATR: Average True Range
A plain measure of how far a security moves in a period, price gaps included. It has no direction, which is what makes it useful for sizing and for stop placement.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- True range accounts for gaps, unlike a simple high-minus-low.
- Average True Range is the mean of true range over a window, conventionally 14 periods.
- It is directionless: it measures magnitude only.
- It is widely used to normalise stop distance and position sizing across securities.
- It expands after a large move, because the large move enters the average.
MAD Academy Training Video · 0:45
The Only Indicator That Sets Your Stop
ATR has no opinion about direction, which is exactly why it is the right tool for sizing a stop and a position.
This lesson is part of a Stock Alerts + Tools plan.
True range
true range = max(high - low, |high - previous close|, |low - previous close|)
- the second and third terms are what make gaps count
A stock that closes at 50 and opens the next day at 45, then trades between 44 and 46, has a high-minus-low of 2 and a true range of 6. The five-point gap was a real move and true range is constructed to capture it.
This matters most in exactly the securities where it is most often ignored. A stock that routinely gaps has a daily range that badly understates how far it actually travels, and a stop sized from that range will be far too tight.
Scroll the chart sideways to see all of it.
Why direction is deliberately absent
ATR answers one question: how much does this security typically move? A $400 stock with an ATR of $8 and a $20 stock with an ATR of $0.40 are both moving about two percent a day, and expressing ATR as a percentage of price is what makes them comparable.
| Security | Price | ATR(14) | ATR as % of price |
|---|---|---|---|
| Large-cap index member | $180 | $2.70 | 1.5% |
| High-beta growth name | $62 | $3.40 | 5.5% |
| Small-cap biotech | $9 | $0.95 | 10.6% |
Those three securities need three very different stop distances and three very different position sizes for the same amount of money to be at risk. That is the entire practical use of the indicator.
Normalising risk
The main practical use is putting different securities on the same footing. A stop placed a fixed number of dollars away is far tighter on a volatile stock than on a quiet one; a stop placed a multiple of ATR away is equivalent across both.
position size = risk budget / (ATR multiple x ATR)
- this is the arithmetic behind volatility-adjusted sizing; see the risk pillar
ATR expands after a large move because the large move enters the average. A stop set as a multiple of ATR immediately after a violent day is therefore much wider than one set the week before, which is the mechanism working as intended rather than a fault.
What it is not
ATR says nothing about direction and nothing about whether current volatility is high or low relative to history unless it is compared to its own past. A rising ATR describes a market that is moving more, which happens in advances and declines alike.
It is also backward-looking, like everything else in this pillar. It describes the last fourteen bars and is silent about whether tomorrow will resemble them.
Where ATR is actually used
ATR is not a signal and produces no entries. Its value is as a unit of measurement: it converts distances on a chart into a number that means the same thing across securities that move at completely different speeds.
| Use | How |
|---|---|
| Position sizing | Risk divided by a multiple of ATR gives a share count that equalises risk across securities |
| Stop placement | A stop set at a multiple of ATR is beyond ordinary daily noise by construction |
| Comparing moves | A 3 percent move is large in one security and ordinary in another; in ATR units they are comparable |
| Regime detection | ATR rising relative to its own average means the security has entered a more volatile period |
| Target setting | A target expressed in ATR scales with how far the security actually travels |
The second row is the one that resolves a common frustration. A stop placed at a fixed percentage is inside normal noise for a volatile security and far outside it for a quiet one, so the same rule produces two different levels of risk. Expressed in ATR, the distance means the same thing everywhere.
ATR includes gaps, because true range measures from the previous close rather than from the current bar's open. That is the difference between it and simple range, and it matters most in exactly the securities where gaps are common.