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The ATR explained simply

The ATR shows how far a price moves on a normal day. It says nothing about direction, but it helps you find a sensible distance for your stop loss.

5 min read Last checked: 2026-09-24

ATR stands for Average True Range. J. Welles Wilder introduced it in 1978, in the same book as the RSI. It's one of the most useful indicators there is, because it answers a practical question: how much movement is normal for this stock?

What it's about

The ATR sits below the price and is measured in euros. An ATR of €1.50 means the price has moved about €1.50 on an average day over the last two weeks. When the ATR rises, things are getting more nervous. When it falls, calmer.

An example: two stocks both cost €50. One has an ATR of €0.50, the other €3. A stop €1 below the entry is far away for the first one. For the second, it will probably be hit on day one. More on volatility in the matching lesson.

How it's calculated

For each day you work out the true range. That's the largest of three values: high minus low, high minus the previous close, or the previous close minus low. That way overnight gaps count too. The ATR is a smoothed 14 day average of these ranges.

With numbers: yesterday a stock closed at €48. Today it opens at €50.50 and moves between €50 and €51. High minus low would only be €1, but the true range is €51 minus €48, so €3.

What signals traders read from it

  • Stop distance: Many set their stop one to three ATRs from the entry so normal daily swings don't trigger it.
  • Position size: With a high ATR the stop sits further away, so you buy fewer shares. That keeps the risk in euros the same.
  • Measuring nerves: A sharply rising ATR shows a market getting nervous, often during drops.

Where it misleads you

The ATR says nothing about direction. A high ATR can show up in a crash just as well as in a rally. Reading it as a buy or sell signal misunderstands it.

It also looks backwards. After a long calm phase the ATR is low, and that's sometimes exactly when the big move comes. A stop calculated with a low ATR can then be too tight.

An example trade with made up numbers

Mark has €10,000 in his account and risks at most €150 per trade. He buys a stock at €50 with an ATR of €1.50. He sets his stop loss two ATRs lower, at €47. With €3 of risk per share, he buys 50 shares for €2,500. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.

If it works: The price rises to €56. Mark is €300 ahead. After €2 in fees and €2 in spread, €296 is left.

If it goes wrong: The price falls and the stop fills at €46.90. That's a €155 loss, €159 with costs.

The ATR didn't tell Mark whether the stock would rise. It helped him choose a stop that doesn't trigger on the first normal swing, and adjust the number of shares so he still only risks €150.

Price and ATR over the same periodPriceATR (14 days) in eurosbig swings during the dropcalm phasezerotoinvest.com
Price and ATR over the same period Made up price data, the ATR is calculated for real (14 days). It jumps during the drop and falls in the calm phase afterwards.

Summary

  • The ATR shows how much movement is normal on a typical day.
  • It says nothing about the direction of the price.
  • It helps with stop distance and position size.

Did you get it?

What does an ATR of €1.50 mean?

That the price has moved about €1.50 on an average day over the last two weeks.

Why does the ATR use the true range instead of just high minus low?

So that overnight gaps count too.

How does the ATR help with position size?

With a high ATR the stop sits further away, so you buy fewer shares and your risk in euros stays the same.

Sources and further reading

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