ATR (Average True Range) measures price volatility by calculating the average range of price movement over a specified period. Unlike standard range (high minus low), ATR accounts for gaps by using “True Range.” Traders use ATR for setting volatility-adjusted stop losses and position sizing.
- Measures average daily price movement
- Accounts for gaps using True Range
- Used for stop losses and position sizing
How ATR Works
ATR calculates average volatility:
True Range Calculation:
True Range = MAX of:
1. High - Low (today's range)
2. |High - Previous Close| (gap up)
3. |Low - Previous Close| (gap down)
ATR = Average of True Range over N periods (usually 14)
Example:
Day 1 TR: ₹15
Day 2 TR: ₹18
Day 3 TR: ₹12
... (14 days)
14-day ATR: ₹16
Meaning: Stock moves approximately ₹16 on average day
Quick Reference: ATR Uses
| Use Case | Application |
|---|---|
| Stop Loss | Set stop at 1-3 ATRs from entry |
| Position Size | Smaller positions when ATR is high |
| Volatility Assessment | Compare ATR across stocks |
| Trailing Stop | Trail by ATR multiple |
| Entry Timing | Enter during low ATR, expect expansion |
Example: ATR-Based Stop Loss
Setting Volatility-Adjusted Stop:
| Stock | Price | ATR | 2 ATR Stop | Stop Price |
|---|---|---|---|---|
| A | ₹500 | ₹10 | ₹20 | ₹480 |
| B | ₹500 | ₹25 | ₹50 | ₹450 |
| C | ₹100 | ₹5 | ₹10 | ₹90 |
Analysis:
- Stock B is more volatile, needs wider stop
- Same entry price (₹500) but different stop distances
- ATR adapts stops to actual volatility
ATR measures average price movement over a period, typically 14 days. Use ATR to set volatility-adjusted stop losses—1 to 3 ATRs from entry. Higher ATR means more volatile stock requiring wider stops or smaller position sizes.
ATR for Position Sizing
Volatility-Adjusted Sizing
Risk Per Trade: ₹5,000
ATR: ₹20
Stop Distance: 2 ATR = ₹40
Position Size = Risk / Stop Distance
Position Size = 5,000 / 40 = 125 shares
If ATR increases to ₹30:
Stop Distance: 2 ATR = ₹60
Position Size = 5,000 / 60 = 83 shares
Higher volatility → Smaller position
ATR Strategies
ATR Trailing Stop
- Trail stop at 2-3 ATRs below highest high (for longs)
- Adjusts automatically as ATR changes
- Captures trends while giving room for volatility
ATR Breakout
- Enter when price moves more than 1 ATR from previous close
- Indicates unusual momentum
- Works for volatility expansion strategies
ATR Channel
- Plot bands at price ± 2 ATR
- Acts like Keltner Channels
- Identifies overextension and mean reversion opportunities
Interpreting ATR Changes
Rising ATR
- Volatility increasing
- Often during trends or panic
- Widen stops, reduce size
Falling ATR
- Volatility decreasing
- Often during consolidation
- Tighten stops (or wait for expansion)
ATR Spikes
- Extreme volatility event
- Often at trend reversals
- Exercise caution
Common Mistakes
-
Fixed point stops – Using ₹10 stop on all stocks ignores volatility differences.
-
Too tight stops with high ATR – Get stopped out by normal volatility.
-
Ignoring ATR changes – ATR varies over time; adjust stops accordingly.
-
Confusing ATR with direction – ATR is magnitude only, not bullish or bearish.
How JournalPlus Uses ATR
JournalPlus logs ATR at entry, helping you analyze whether your stop losses are appropriately sized relative to each stock’s volatility.
