Average True Range (ATR): Indicator Guide
Average True Range, or ATR, shows how far a stock typically moves in one day, in dollars. A high ATR means big daily swings and a low ATR means quiet days. It says nothing about whether the price is heading up or down. On a chart with shorter candles, such as 5-minute bars, the same reading covers one candle instead of one day.
What It Shows
ATR measures the size of a stock's daily swings. It answers one question: on a normal day, how far does this price travel? In made-up numbers, a stock with an ATR of $5 usually moves about $5 between its high and low. A stock with an ATR of $0.50 barely stirs.
That makes ATR a volatility indicator, not a trend indicator. Two stocks can have the same ATR while one climbs and the other falls. Use ATR to judge how bumpy the ride is, and use other tools to judge direction.
How It's Calculated
Each day gets a true range, which is the largest of three numbers: today's high minus today's low, today's high minus yesterday's close, and yesterday's close minus today's low, with any minus sign dropped. The second and third checks catch gaps, such as a stock that opens far above or below where it closed the day before.
Averaging those true ranges over the last N days gives the ATR. Fourteen is the usual setting. Each new day is added and the oldest drops out, so the line shifts as conditions change.
Worked example with made-up prices: yesterday's close was $53 and today the stock traded between $49 and $52. High minus low is $3. High minus yesterday's close is $1. Yesterday's close minus the low is $4. The true range is $4, because the stock gapped down before it traded.
How to Read It
Three readings to try. The dollar figures below are made up.
- Size gauge. A $5 ATR on a made-up $100 stock is a different story from a $5 ATR on a made-up $20 stock, so divide ATR by the price to compare stocks. Rapunzl's Stock Scanner does this for you with its ATR % field.
- Rising or falling. A rising ATR means daily swings are widening, and it often does so around earnings reports, news and sharp price breaks. A falling ATR means the range is narrowing and the stock is settling.
- Distances in ATRs. Some traders measure distances in ATRs, such as how many ATRs a price sits above its 20-day average, so a distance means the same thing for a calm stock and a wild one.
Where It Misleads
The reading has no direction. A high ATR can come from a surge or a crash. Because ATR is counted in dollars, the raw figure for a made-up $500 stock and for a made-up $10 stock sit on different scales and cannot be compared. Use ATR % instead.
One huge gap day can also lift ATR for a while after it happens, which makes a stock look wilder than a typical week would suggest.
Settings in Rapunzl
| Setting | Default | Range |
|---|---|---|
| Period | 14 | 1 to 400 |
Period sets how many days are averaged. A short period such as 5 picks up new volatility quickly but jumps around. A long period such as 50 draws a smoother line that is slower to notice a change.
Try It in Rapunzl
Because ATR needs each day's high and low, it does not show on a line chart. Open any stock's chart in Rapunzl and switch to Candlestick or OHLC first. Then open Customize Chart → Chart Indicators → Advanced Indicators and add Average True Range. The study gets its own panel under the price. Leave the period at 14 first, then try 5 and 50 and compare. Average True Range is one of the Advanced studies, which are part of Rapunzl Premium.
Two ideas in the Stock Scanner are built on ATR, and the ATR % field is free there. "Steady and calm" picks company stocks worth $10 billion or more whose usual daily move is 2% or less. "Wild rides" picks actively traded stocks whose usual daily move is 5% or more. Run both, open a few results and add ATR to their charts to see the difference.
A 15-Minute Class Activity
Calm or Wild? Students work in pairs with no devices. You need a board and a pencil each.
- 3 minutes. Walk through the worked example above on the board. Ask the class why the true range was $4 and not $3.
- 5 minutes. Give each pair five made-up true ranges for two made-up stocks. Calm Co.: $2, $2, $3, $2, $1. Wild Co.: $9, $12, $10, $14, $10. Pairs find the ATR for each. The answers are $2 and $11.
- 4 minutes. Tell the pairs both made-up stocks trade near $100. They divide each ATR by the price to get ATR %: 2% and 11%. Ask which stock would pass the daily-move rule in the Stock Scanner's "Steady and calm" idea, which wants a usual daily move of 2% or less (the idea also asks for a $10 billion company, which these made-up stocks don't claim).
- 3 minutes. Exit ticket: in one sentence, explain why a high ATR does not mean the price will rise.
Related Indicators
- Keltner Channels: bands set by ATR around an EMA.
- Bollinger Bands: the other volatility band, drawn from standard deviation.
- ADX and ATR: pairs ATR with ADX trend strength in the Stock Scanner.
- OHLC Chart: the bars whose highs and lows feed each true range.
Frequently Asked
Questions
ATR measures how far a stock typically moves in one day, in dollars. High means big swings and low means calm days.
No. ATR shows the size of the swings, not the direction. A high reading can come from a surge or a crash.
A dollar ATR carries the stock's price level with it, so a made-up $500 stock and a made-up $10 stock print very different numbers. ATR % divides the daily move by the price, so any two stocks can be placed side by side.
ATR is a chart study that is part of Rapunzl Premium. The ATR % field in Rapunzl's Stock Scanner is free.
Teach Chart Reading With Rapunzl
Request a demo to see how Rapunzl's charts, Stock Scanner and simulator fit your course. If you want your own student to explore indicators at home, the details are on our parents page.
Indicators, patterns and examples in this article are for education and are not investment advice or a recommendation to buy or sell any security.
By Myles Gage, CEO & Co-Founder at Rapunzl.