Category: Volatility Indicator (Risk Management)

Introduction to ATR

Definition

The ATR (Average True Range) does not concern itself with the direction of the price (up or down). It only focuses on the intensity of the movement.

It measures the market's "nervousness" or "heat."

• Low ATR = The market is calm, the candles are small.
• High ATR = The market is volatile, the candles are large.

The Intention: Why use it?

It is mainly used to answer the question: "Where should I place my Stop-Loss so I don't get stopped out foolishly?"

It allows you to adapt your trading to the market's weather: you don't drive the same way on a dry highway (low volatility) as you do in a thunderstorm (strong volatility).

The Formula (The concept)

The ATR calculates the average (generally over 14 days) of the "True Range." The True Range is the largest value among these three differences:

1. Today's high minus today's low.
2. Today's high minus yesterday's close (to capture bullish Gaps).
3. Today's low minus yesterday's close (to capture bearish Gaps).

In summary: It captures the total amplitude of the daily movement, even if there are trading gaps.

ATR in Practice

How to read it?

Unlike the RSI, the ATR has no bounds (0 to 100). Its value is in currency (e.g., $2, €15, 0.50 points).

• If Apple stock is worth $150 and the ATR is $3: This means that, on average, Apple moves $3 per day.
• If the ATR suddenly rises to $6: Volatility has doubled, the risk has doubled.

The Golden Case: Placing your Stop-Loss

This is the #1 use. Placing a stop-loss at a fixed amount (e.g., "I sell if I lose €1") is a mistake. Your stop must be placed according to the market noise.

• The "2x ATR" Rule: Place your Stop-Loss at a distance of 2 times the ATR value from your entry price.
• Example: You buy at €100. The ATR is €2.
• 2 x €2 = €4.
• Your Stop-Loss should be at €96 (100 - 4).
• Why? To let the stock "breathe" without your positions being cut by the simple normal daily fluctuation.

Confirming a Breakout

If the price breaks an important resistance (a ceiling), look at the ATR:

• Breakout + Rising ATR: There is energy, the breakout is likely valid.
• Breakout + Falling ATR: The market is sluggish, it is likely a false breakout.

Going Further (Advanced Level)

"Position Sizing"

Pros use the ATR to decide how many shares to buy.

• Rule: If the ATR increases, I reduce the size of my position.
• If the ATR of a crypto is huge, I buy less of it than of a stable stock like "Coca-Cola." This allows for constant dollar risk across the entire portfolio, regardless of the asset.

The Trailing Stop (Chandelier Exit)

This is a technique to let your gains run.

Instead of leaving the Stop-Loss fixed, you raise it every day. You often subtract 3x ATR from the recently reached highest price. As long as the price does not fall back below this "Chandelier" line, you remain in the position.

Normalized ATR (ATR %)

Since the ATR is in dollars, you cannot compare the ATR of Amazon ($180) and that of PennyStock ($5).

To compare, you divide the ATR by the price: $(ATR / Price) \times 100$.

This gives you the volatility as a percentage. Very useful for your Investminder Screener to find the most "explosive" stocks.

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Updated on: 02/03/2026