Glossary term
ATR (Average True Range)
J. Welles Wilder's 1978 volatility measure. True range is the greatest of: current high minus low, high minus prior close, or low minus prior close — capturing gaps a simple high-low range misses. ATR is its 14-period moving average, expressed in price units. It measures volatility magnitude only; it carries no directional information.
Definition & the True Range
Average True Range starts from True Range, a single-bar measure defined as the greatest of three values: the current high minus the current low, the current high minus the prior close, or the current low minus the prior close. Using the prior close in two of the three terms is what separates True Range from a simple high-low range — it captures overnight and weekend gaps that a plain range calculation would understate. ATR is the 14-period moving average of True Range, introduced by J. Welles Wilder Jr. in his 1978 book alongside RSI and ADX. It is expressed in the instrument's own price units — dollars for a stock, points for an index — not as a percentage or a bounded oscillator.
The Standard Volatility Unit for Stops & Sizing
Because ATR is denominated in price, it converts directly into position management: a stop placed at, say, 2×ATR below entry adapts automatically to whether an instrument is quiet or volatile, without requiring a separate volatility judgment for every ticker. Position-sizing formulas commonly target a fixed dollar risk per trade divided by ATR, so a high-ATR stock and a low-ATR stock carry roughly comparable risk at the position level — a more consistent approach than sizing by share count or a fixed percentage alone, and one that pairs naturally with capital-allocation frameworks like the Kelly Criterion.
What ATR Does Not Tell You
ATR measures the magnitude of price movement, full stop — it says nothing about direction, and a rising ATR is equally consistent with a sharp rally or a sharp drawdown. It also does not distinguish trending volatility from choppy volatility: two instruments with identical ATR can have entirely different character, one grinding steadily in one direction and the other reversing back and forth. Reading ATR alongside a directional-strength measure such as ADX is the standard way to separate the two.