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ATR explained: how average true range helps you place a stop

ATR doesn't tell you where price is going. It tells you how far price usually moves in one candle. That one fact makes stops and trade size much easier to work out.

Beginner guide · 7-minute read · Updated 2026-10-21

What ATR measures

ATR stands for average true range. J. Welles Wilder introduced it in 1978, in the same book as RSI and ADX.

It answers one question: how big is a typical candle lately?

It's measured in price. If a stock's ATR is 2.00, its candles have recently covered about 2 dollars from end to end, on average.

ATR has no direction. A rising ATR can happen in a rally or a sell-off. It only means the candles are getting bigger.

"True range": the clever part

A candle's plain range is just high minus low.

But what if price gaps? Say yesterday closed at 100 and today opened at 103. The move from 100 to 103 happened, even though no candle drew it.

So Wilder used the true range. It's the biggest of these three:

1. Today's high minus today's low.
2. Today's high minus yesterday's close (ignore the minus sign).
3. Today's low minus yesterday's close (ignore the minus sign).

A worked example

Yesterday closed at 100. Today's high is 105 and today's low is 101.

• High − low = 105 − 101 = 4
• High − yesterday's close = 105 − 100 = 5
• Low − yesterday's close = 101 − 100 = 1

The biggest is 5. So today's true range is 5, not 4. The gap counts.

How the 14-period ATR is worked out

The default looks back 14 candles.

Wilder's version doesn't use a plain average. It smooths the number a little each candle:

• New ATR = (old ATR × 13 + today's true range) ÷ 14

Example: the old ATR is 3.0 and today's true range is 5.

• (3.0 × 13 + 5) ÷ 14 = (39 + 5) ÷ 14 = 3.14

One big candle nudges ATR up a little. It doesn't jump. That's why ATR moves slowly and calmly.

Using ATR to place a stop

Here's why traders love it.

A Stop loss that sits closer than one normal candle's swing can get hit by everyday noise. ATR shows you how big that noise is.

Some traders check their chart stop against ATR:

• The stop sits beyond the last turning point on the chart (that's where it belongs).
• Then they ask: is that stop at least about 1 ATR away? If it's much closer, everyday noise may reach it.

Others place the stop at a multiple of ATR, like 1.5 or 2 ATR from entry. That works, but it ignores the chart. We prefer the chart first, ATR as a sanity check.

From ATR to trade size

Wider stop means smaller size. That keeps your risk the same.

Example in units:

• Account: 10,000 units. Risk 1%: 100 units.
• ATR is 2.00. The chart stop sits 3.00 below entry (about 1.5 ATR).
• Size: 100 ÷ 3.00 = 33 shares (rounded down).

If ATR doubles next month and the stop becomes 6.00, the size halves to 16 shares. Same 100 units at risk.

A math example, not a promise. Price can still gap past your stop, so a loss can be bigger than planned. The position size calculator does this for you.

Other ways traders use ATR

• Setting realistic targets. If a market moves about 2.00 a day, a target 10.00 away in one day is a lot to ask.
• Trailing a stop. A Trailing stop set some ATRs behind price gives the trade room as it moves.
• Spotting quiet vs busy days. ATR far below normal can mean a quiet stretch. Far above normal often follows big news.
• Comparing markets. ATR as a share of price (ATR ÷ price) lets you compare a 20-dollar stock with a 500-dollar one.

What ATR can't do

• It can't show direction. Big candles up and big candles down look the same to ATR.
• It lags. It's built from past candles and smoothed. After a sudden shock, it takes a while to catch up.
• It changes with the timeframe. A 5-minute ATR and a daily ATR are very different numbers. Use the one that matches your chart.

Where it fits with our method

We set the stop from the chart: just past the last place price turned around. Then we size from the math.

ATR adds one honest check: is my stop inside the normal noise?

If yes, either the setup is too tight for this market, or the size needs to come down with a wider stop. Either way, the risk stays around 1%. See how to set a stop loss and how much to risk per trade.

Common mistakes

• Reading a rising ATR as bullish. It only means bigger candles, in either direction.
• Stops tighter than one ATR "to risk less". Often that just means getting stopped by noise.
• Keeping the same size when ATR doubles. Twice the stop distance at the same size is twice the risk.
• Mixing timeframes. A daily ATR stop on a 5-minute trade is far too wide.

Try it today on TradingView

About 10 minutes.

1. Open a daily chart. Add "Average True Range" from Indicators (length 14).
2. Write down today's ATR value.
3. Find the last clear turning point and measure the distance from price to just past it.
4. Divide that distance by ATR. Is your stop about 1 ATR away, less, or more?
5. Run the numbers in the position size calculator and note the size in your journal.

Questions