Average True Range (ATR): A Comprehensive Guide to Volatility Measurement

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The Average True Range (ATR) is a powerful technical analysis tool designed to measure market volatility. Unlike other indicators that predict price direction, ATR focuses solely on the degree of price movement—how much, not which way. Developed by renowned trader and analyst Welles Wilder, this indicator was originally intended for commodity markets but has since become widely adopted across various financial instruments, including stocks, forex, and futures.

By analyzing historical price data, ATR helps traders assess the level of market activity and make more informed decisions about position sizing, stop-loss placement, and trade timing. Its simplicity and effectiveness have cemented its place in the toolkit of both novice and experienced traders.

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Understanding the Average True Range Formula

To calculate the ATR, you need three key data points for each trading period: the daily high, daily low, and previous day’s closing price. The foundation of ATR lies in the concept of the True Range (TR), which expands upon the traditional daily range.

The daily range is simply the difference between the current day’s high and low:

Daily Range = High - Low

However, this doesn’t account for gaps between trading sessions. That’s where True Range comes in—it captures volatility that might be missed by the standard range.

The True Range is defined as the greatest of the following three values:

In mathematical terms:

True Range = MAX[(High - Low), |High - Previous Close|, |Low - Previous Close|]

This ensures that any significant price gap from the prior session is reflected in the volatility measurement.

Once you’ve calculated the True Range for each period, the Average True Range is derived using a smoothing technique. Welles Wilder recommended a 14-period smoothed moving average of the True Range values. While some platforms use a simple average for the first calculation, subsequent values are typically updated using an exponential smoothing formula:

ATR = [(Prior ATR × 13) + Current TR] / 14

This approach gives more weight to recent volatility while maintaining continuity with past data.

Interpreting the Average True Range

So, what does ATR tell us about market behavior?

An increasing ATR indicates that volatility is rising—traders are actively pushing prices higher or lower with strong conviction. This often occurs during news events, earnings releases, or shifts in market sentiment. Higher ATR values suggest greater enthusiasm or fear in the market, signaling potential breakout opportunities.

Conversely, a declining ATR reflects decreasing volatility and waning interest. Prices may consolidate in a tight range, suggesting uncertainty or lack of momentum. Low ATR readings can precede significant moves, especially if followed by a sudden spike.

One of the key advantages of ATR is that it is a first-moment measure of volatility. Unlike standard deviation—which squares deviations before averaging (a second-moment statistic)—ATR uses absolute differences. This makes it less sensitive to extreme outliers and more robust in real-world trading conditions.

Moreover, because ATR is based on price ranges rather than direction, it remains neutral—equally useful in bull and bear markets.

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Normalized Average True Range: Making Comparisons Easier

While ATR provides valuable insight into absolute volatility, comparing ATR values across different assets can be misleading due to varying price levels. For example, a $5 ATR on a $500 stock isn't equivalent to a $5 ATR on a $50 stock.

To solve this, traders often use the Normalized Average True Range (NATR), which expresses ATR as a percentage of the current price:

NATR (%) = (ATR / Current Closing Price) × 100

This allows for meaningful comparisons between securities of different prices and helps identify relative volatility trends across markets.

How to Calculate Average True Range in Excel

Calculating ATR manually can be time-consuming, but Excel makes it straightforward with basic formulas and cell references.

Here’s a step-by-step guide:

  1. Import Historical Data: Gather columns for Date, High, Low, and Close.

  2. Calculate True Range:

    • In a new column, use =MAX(B2-C2, ABS(B2-D1), ABS(C2-D1)) assuming B=High, C=Low, D=Close.

  3. Compute Initial ATR:

    • Take the average of the first 14 True Range values: =AVERAGE(E2:E15)

  4. Smooth Subsequent ATR Values:

    • Use the formula: =(E16*13 + F15)/14, where E is prior ATR and F is current TR.
  5. Drag Formula Down: Apply the smoothing formula across all remaining rows.

With this setup, your spreadsheet will dynamically update ATR as new data comes in.

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Frequently Asked Questions (FAQ)

Q: Is ATR a leading or lagging indicator?
A: ATR is a lagging indicator because it’s based on past price data. It reflects historical volatility rather than predicting future movements.

Q: Can ATR be used to predict price direction?
A: No. ATR measures only volatility, not direction. It tells you how much price is moving, not whether it will go up or down.

Q: What timeframes work best with ATR?
A: ATR is versatile and works well on all timeframes—from 1-minute charts for scalping to weekly charts for long-term investing. The standard 14-period setting adapts effectively across durations.

Q: How do traders use ATR for stop-loss placement?
A: Many traders set stop-loss orders at a multiple of the ATR (e.g., 1.5× or 2×) below entry for long positions. This accounts for normal volatility and reduces the chance of being stopped out prematurely.

Q: Does ATR work in sideways markets?
A: Yes, but interpretation changes. In ranging markets, low ATR values confirm consolidation. Traders watch for rising ATR as an early signal of breakout potential.

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Whether you're managing risk or identifying breakout setups, mastering the Average True Range empowers you to trade with greater confidence in any market environment.