What is Average True Range (ATR)?
Average True Range averages the true range of price bars, capturing gaps. Traders use ATR to set stop distance and size positions relative to current volatility.
Formula
True Range = MAX( High − Low, |High − Prior Close|, |Low − Prior Close| )
Indian market context (NSE)
Reference levels: Nifty 50 at 24,300, Reliance Industries at ₹1,300, Bank Nifty futures at 55,000 (lot size 30). Examples below show how Average True Range (ATR) shows up on Indian index, equity, and futures books — update to live quotes in your journal.
Nifty 50 perspective
Average True Range on Nifty (24,300): on the 15-minute chart, combine with session VWAP and 9:15–10:00 liquidity — index average true range signals misfire on expiry Tuesdays without volume confirmation.
Reliance Industries perspective
Average True Range on Reliance at ₹1,300: daily vs hourly settings diverge around results and ex-dividend dates; note corporate events in journal when average true range readings spike.
Bank Nifty futures perspective
Average True Range on Bank Nifty futures (55,000): first-hour signals differ from post-14:30 behaviour; avoid standalone entries when banking names lead the move.
If Bank Nifty ATR expands from 180 to 280 points, a fixed 150-point stop that worked last month may clip you prematurely — log ATR at entry.
How to validate
- Forward-test Average True Range (ATR) on paper or sim for two weeks after rule changes.
- Validate only on trades where Average True Range (ATR) settings matched the written playbook.
- Split results by trending vs range weeks on Nifty before trusting the signal.
- Require higher-timeframe bias agreement if that is part of your rule.
How to track in TradeLyser
- Add Average True Range (ATR) reading to trade entry notes (value + timeframe).
- Create tags: “Average True Range (ATR) aligned” / “Average True Range (ATR) ignored”.
- Monthly: filter trades by alignment tag and compare win rate and avg R.
- Screenshot chart context for mentor review on disputed trades.
Best practices
- Combine Average True Range (ATR) with higher-timeframe bias — not as a lone trigger.
- Avoid curve-fitting settings on less than three months of tagged data.
- Refresh playbook screenshots when changing Average True Range (ATR) parameters.
- Skip trading when Average True Range (ATR) conflicts with written risk limits.
Common pitfalls
- Treating Average True Range (ATR) as a guaranteed reversal signal.
- Optimising parameters on one bullish month only.
- Trading against higher-timeframe bias because Average True Range (ATR) “said so”.
- Failing to log when you overrode Average True Range (ATR) discretionally.
How to use this in TradeLyser
Record ATR(14) and stop multiple in entry notes. Filter trades by “ATR regime” tag after budget or RBI weeks.
Related terms
Bollinger Bands place upper and lower bands around a moving average, typically ±2 standard deviations. Band width reflects recent volatility.
Position sizing translates account risk into quantity. With a ₹2,000 risk cap and ₹40 stop per share, size is 50 shares — before lot multiples on F&O.
A stop loss is a pre-defined exit when the market moves against you by a set amount. It caps loss per trade when fills match your plan.
Volatility quantifies variability — in prices (historical/realised) or in option premiums (implied). Higher volatility means wider expected swings over a horizon.
FAQ
What is a good ATR value for stocks?
There is no universally good ATR value — it depends on the stock price and your timeframe. For SPY, a 14-day ATR of $5–$8 indicates calm conditions; above $15 signals elevated volatility. Compare ATR relative to price (ATR%) rather than in absolute dollars across different instruments.
How do you use ATR to set a stop loss?
Place your stop loss 1.5 to 3 times the ATR below your entry for long trades. A 2× ATR stop gives the trade enough room to breathe through normal daily noise without being stopped out prematurely. Adjust the multiplier based on your risk tolerance and the stock's typical behavior.
What is the difference between ATR and true range?
True range is a single bar's measurement — the greatest of: current high minus low, current high minus prior close, or current low minus prior close. ATR is the smoothed moving average of true range values over a lookback period, typically 14 bars, making it a stable, usable indicator rather than a raw single-bar reading.
Does ATR tell you the direction of price movement?
No. ATR measures only the magnitude of price movement, not direction. A high ATR means large moves are occurring, but it gives no signal about whether prices are rising or falling. To determine trend direction, pair ATR with a directional indicator such as [ADX](Adx) or moving averages.
What period should I use for ATR?
J. Welles Wilder's default is 14 periods, which remains the standard. Shorter periods (7–10) react faster to volatility changes but produce noisier readings. Longer periods (20–21) smooth out spikes and work better for swing or position traders. Match the period to your holding timeframe.
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