What Is ATR (Average True Range) and How Is It Used to Set Stops and Size Positions?
How far the stock typically moves in a day, gaps included, as a percentage of its price. Below 1.5% is quiet, above 3% is volatile; commonly used to set stop distance and position size.
Contents (5 sections)
ATR, the Average True Range, measures how much a stock typically moves in a day. It says nothing about direction. Its use is practical: it tells you how much room a normal day needs, which is what a stop distance and a position size should be based on.
How it is calculated
Each day has a true range, the largest of three distances:
- today's high minus today's low;
- today's high minus yesterday's close;
- yesterday's close minus today's low.
The last two matter when a stock gaps: if it closed at 100 and opens at 106, the day's range from high to low may be small, but the stock still moved six. ATR(14) is the average of the true range over 14 days, smoothed so that one wild day does not swing it.
ATR in price units and as a percentage
ATR itself is in price units: an ATR of 2 means the stock typically covers 2 in a day. That number means little without the price. Two per day is quiet for a 400 stock and violent for a 20 one.
Dividing ATR by the price gives a percentage that compares across stocks:
| ATR as % of price | What it usually means |
|---|---|
| Below 1.5% | Quiet: large, stable companies |
| 1.5% to 3% | Ordinary |
| Above 3% | Volatile: a normal day can move the stock more than many stop-losses allow |
What it does not tell you
- Direction. A stock falling steadily and one rising steadily can have the same ATR.
- Tomorrow. ATR describes the last 14 days. Around earnings, a stock can move several ATRs in one session.
- Whether a stock is risky to own. It measures day-to-day movement, not the chance of a permanent loss.
In Stock Compass
Two rule indicators exist: atr14, in price units, and atr14_pct, ATR as a percentage of the price. Use the percentage in rules, since it means the same thing on every stock; for example, atr14_pct below 4 keeps the most erratic stocks out of a buy rule.
ATR also sits behind position sizing. The suggested size for a new position is worked out from how much you are willing to lose on the trade divided by the stop distance. When your strategy has a stop written as a floating loss, that is the distance; when it has none, no size is suggested. ATR is the usual way to judge whether that stop is too tight: a stop inside one day's ordinary range gets hit by noise. Position sizing and risk per trade walks through the arithmetic.
FAQ
How do I use ATR to set a stop-loss?
A common approach is to place the stop a multiple of ATR away from the entry, often 1.5 to 3 times, so that an ordinary day does not trigger it. Which multiple suits a strategy is something to test. Stock Compass sizes positions from the stop written in your strategy; with no stop there, it suggests no size.
What is a high ATR?
In price units there is no answer, because it depends on the share price. As a percentage of price, above about 3 percent is volatile for a stock and below about 1.5 percent is quiet.
Why does ATR use yesterday's close?
To count gaps. A stock that opens far from the previous close has moved, even if the range from high to low that day was narrow. The true range takes the largest of the three distances so the gap is included.
Definition only — not investment advice.