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Glossary

What Is ATR? Average True Range Explained

ATR, or Average True Range, measures the typical size of price movement over a chosen number of candles, including gaps from the previous close. It measures volatility, not direction. An ATR of ₹8 does not predict that a stock will rise ₹8 or guarantee that a stop placed one ATR away will hold.

How true range is calculated

For each candle, true range is the largest of:

  • High minus low.
  • Absolute high minus previous close.
  • Absolute low minus previous close.

The previous close matters because a stock can gap beyond the prior session's range. ATR smooths those true-range values; Wilder's smoothing is a common convention.

An Indian-stock example

Suppose yesterday's close was ₹500, today's high is ₹512 and today's low is ₹506. The three distances are ₹6, ₹12 and ₹6, so true range is ₹12, not ₹6.

If a daily ATR were ₹8, a two-ATR distance would be ₹16. That is a way to express a risk assumption, not a recommended stop or a promise about tomorrow's movement.

Using ATR in risk research

A hypothetical ₹1,000 risk budget divided by a ₹16 stop distance gives 62 whole shares before fees, slippage, capital limits and any instrument restrictions. The calculation does not ensure the stop will fill at its intended level.

Keep the timeframe explicit. Daily ATR and five-minute ATR answer different questions. See slippage for why a volatility-based stop is not a guaranteed loss cap, and Supertrend for a trend indicator that uses ATR.

Limitations

  • ATR is backward-looking and cannot cap gap losses.
  • Smoothing, warmup and timeframe choices can produce different values.

Frequently asked questions

What does ATR 14 mean?
It uses a 14-candle lookback for smoothing true range. On a daily chart that means daily candles; on a five-minute chart it means five-minute candles.
Does high ATR mean bullish?
No. Large downward moves and gaps can raise ATR just as large upward moves can.
Can I compare two stocks using ATR alone?
Raw ATR is in price units. Dividing ATR by price and multiplying by 100 gives a percentage measure that is easier to compare across different prices, though timeframe and smoothing must also match.
  • Supertrend Indicator: Formula, Settings and UseWhat the Supertrend indicator is, how it uses ATR and a multiplier (10, 3), how traders read flips, common pitfalls and how to add it on TradingLead charts.
  • What Is Slippage in Trading?Slippage is the gap between the price you expect and the price you get. Learn why it matters in backtests and how TradingLead models it in bps or ticks.
  • What Is a Chart Timeframe?Understand candle timeframes, TradingLead's minute presets and custom intervals, daily to monthly views, session boundaries and second-chart limitations.

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