Average True Range: Measuring How Much a Stock Moves

Average True Range measures how much a stock typically moves in a period, expressed in the stock's own price units. It says nothing whatsoever about direction. A stock in a steady climb and a stock in a steady decline can have identical ATR readings.

That absence of direction is a feature. It makes ATR one of the few indicators that cannot be misread as a forecast, because there is nothing directional in it to misread.

The "true" part

The obvious measure of daily movement is high minus low. True range improves on it by handling gaps, which the simple range ignores entirely.

True range for a period is the largest of three values: the high minus the low, the absolute difference between the high and the previous close, and the absolute difference between the low and the previous close.

The second and third exist for a specific situation. When a stock closes at 100 and opens the next day at 92 on overnight news, then trades between 91 and 93 all session, the simple range is 2, which describes a quiet day and completely misses the eight point gap. True range captures the full nine point move from the previous close. For any stock that reacts to news released outside trading hours, which is most of them, this correction is substantial.

ATR is then the average of true range over a number of periods, conventionally fourteen.

Why it is expressed in price units

An ATR of 3 means the stock has been moving about three dollars a day recently. This is directly usable in a way a percentage sometimes is not: position sizing, stop distances and expected daily variation all work in price units.

The cost is that raw ATR is not comparable between stocks. An ATR of 3 on a 40 dollar stock is a much larger proportional move than an ATR of 3 on a 400 dollar stock. Dividing ATR by price gives a percentage that is comparable, and that is the form to use when ranking a group of stocks by how much they move.

What it is used for

• Sizing. A stock that moves three dollars a day and one that moves thirty cents require different position sizes for the same exposure to daily variation.
• Distance setting. A stop placed within normal daily movement will be hit by normal daily movement. ATR gives a measure of what normal is for this stock rather than a round number applied to everything.
• Regime detection. Rising ATR means the stock is moving more than it was. Falling ATR means it has quietened. This is often the most informative use, because a change in how much a stock moves frequently precedes or accompanies a change in what is happening to it.

The limits

ATR is backward looking by construction. It reports what movement has been, and the fourteen period default means a single dramatic day influences the reading for the following fourteen periods, then drops out abruptly. That drop can make ATR appear to fall sharply when nothing has changed except that an old observation left the window.

It also treats upward and downward movement identically, which is correct for its purpose and worth remembering when it is being used as a proxy for risk. A stock that has been rising steadily and a stock that has been falling steadily are not equivalent situations, and ATR alone cannot distinguish them.

Movement, and what it cannot settle

How much a stock moves is one input to the price behaviour dimension EquityBias reads per covered stock, alongside fundamentals, analyst activity and news sentiment. No single dimension carries a conclusion, and where they disagree the gap is reported as divergence rather than averaged away. Related: Bollinger Bands for volatility drawn around price, and drawdown for the worst case rather than the typical case. Current readings by sector are in the coverage directory.

EquityBias is a market data research tool. Nothing here is financial advice. Indicator readings describe past price movement and do not indicate future performance.