Field Guide to Trading Terms

Average true range

Family VI · Charts & indicators

Not to be confused with exponential moving average, moving average, moving average crossover.

Average True Range (ATR) measures market volatility by averaging the true range over a chosen number of periods, typically 14. It was introduced by J. Welles Wilder in his 1978 book New Concepts in Technical Trading Systems. ATR is not a directional indicator; it quantifies the degree of price movement, regardless of trend.

Calculation

True range (TR) for a given period is the maximum of three values: the current high minus the current low, the absolute difference between the current high and the previous close, and the absolute difference between the current low and the previous close. The ATR is then a moving average of TR over n periods. Wilder originally used a smoothed moving average, but simple or exponential moving averages are also common. The choice of average and period length can vary by trader or platform.

Worked example

Consider a stock with the following daily data over three days. Day 1: high 50, low 48, close 49. Day 2: high 51, low 49, close 50. Day 3: high 52, low 50, close 51. Using a 3-period simple moving average of true range:

3-day ATR calculation
Day 1 TRmax(50-48, |50-49|, |48-49|) = max(2,1,1)2
Day 2 TRmax(51-49, |51-49|, |49-49|) = max(2,2,0)2
Day 3 TRmax(52-50, |52-50|, |50-50|) = max(2,2,0)2
3-day ATR(2 + 2 + 2) / 32.00

Interpretation and use

A higher ATR indicates greater volatility, while a lower ATR indicates less. Traders may use ATR to set stop-loss levels (e.g., a multiple of ATR below entry) or to size positions based on volatility. ATR does not indicate price direction; it only reflects the magnitude of price movement. Some platforms allow different averaging methods, so ATR values can differ slightly between systems.

Often confused with

exponential moving average
An exponential moving average is a type of moving average that assigns greater weight to recent data points, whereas ATR is a volatility measure based on true range; the visible sign is that EMA is plotted as a line on price charts, while ATR appears in a separate panel below the price.
moving average
A moving average is a general smoothing tool that averages prices over a period, while ATR specifically averages true range values to quantify volatility; the visible sign is that a moving average follows price direction, whereas ATR fluctuates with volatility regardless of trend.
moving average crossover
A moving average crossover is a signal generated when two moving averages intersect, used to identify trend changes, while ATR measures volatility and does not generate crossover signals; the visible sign is that a crossover involves two lines intersecting on the price chart, whereas ATR is a single line in a separate indicator panel.

See also

Family: VI · Charts & indicators · Index A–Z