Average True Range (ATR) measures how much a stock actually moves — not just its percentage gain or loss. Learn how traders use ATR for stop placement, position sizing, and spotting overextended stocks.
Average True Range (ATR) was created by J. Welles Wilder (the same technician who created RSI) and introduced in his 1978 book New Concepts in Technical Trading Systems. It answers a deceptively simple question: how much does this stock actually move on a typical day?
Unlike percentage moves, which can distort when comparing stocks at different price levels, ATR gives you the real dollar (or point) movement to expect — which makes it directly applicable to position sizing and stop-loss placement.
ATR is based on the concept of True Range, which is the largest of:
The True Range captures gap days: if a stock gaps up significantly at the open, that gap is included in the True Range even though the intraday high-to-low range alone would miss it. ATR is then a 14-period smoothed average of daily True Ranges. A stock with an ATR of $3 typically moves about $3 from its low to its high on a given day — or gaps $3 overnight.
ATR-based stops are among the most widely used by professional traders because they adapt to actual market volatility rather than using arbitrary percentages.
The logic: if you set your stop $0.50 below your entry on a stock with a $3 ATR, you will be stopped out by normal intraday noise almost immediately. You need to give the trade room to breathe — typically 1.5–2× ATR below your entry — so that a normal pullback doesn't trigger your stop before the trade has a chance to develop.
Example: Stock at $50, ATR = $2. Stop at 1.5× ATR below entry: $50 − $3 = $47 stop. This gives the trade room for normal daily volatility without being too far away to violate a reasonable risk per trade.
Once you know your stop distance (in ATR terms), ATR feeds directly into position sizing. A common framework:
This approach automatically sizes you smaller in high-volatility stocks (wide ATR) and larger in low-volatility stocks (tight ATR), which is exactly right: you take the same dollar risk on every trade regardless of how wild the stock is.
ATR extension compares a stock's recent move to its ATR. If a stock has moved 4× its ATR in a short period, it is significantly overextended — the move has exceeded typical daily volatility by a large factor. These are often not good entry points for new long positions.
Trading Awareness uses ATR extension as one of the inputs in the Leadership Score. Stocks that are significantly extended above recent averages score lower on the extension component, reflecting the higher risk of chasing an overextended move. The Charting tab shows ATR values and extension for any symbol.
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