What Is Average True Range (ATR) in Trading?
Average True Range (ATR) is a technical indicator that measures how much a stock or index typically moves over a given period, calculated as the average "true range" — the greatest of the day’s high-low range, the gap from the previous close to the high, or the gap from the previous close to the low — over a set number of candles, usually 14. ATR measures volatility, not direction.
Formula
True Range = max(High − Low, |High − Prev Close|, |Low − Prev Close|); ATR = average True Range over N periodsWorked example
NIFTY’s 14-day ATR is currently 180 points. A trader using ATR-based stops might place a stop-loss at 1.5× ATR below their entry, which works out to 270 points, and size their position so a 270-point move against them equals a fixed rupee risk they have already decided to take.
If ATR later expands to 260 points during a volatile week (say, around a budget announcement or RBI policy decision), the same trader would widen the stop distance and reduce position size proportionally, keeping the rupee risk constant even though the market is moving more.
What's a good number?
There is no "good" ATR value in isolation — it is specific to the instrument and changes daily with market conditions. A rising ATR signals expanding volatility; a falling ATR signals a quieter, contracting market.
What matters is using ATR relative to its own recent history, and calibrating stop-loss distance and position size to the current ATR reading rather than to a fixed point value that may have made sense in a different volatility regime.
Common mistakes traders make with average true range (atr)
- Using the same fixed-point stop-loss across all market conditions instead of adjusting it as ATR expands or contracts.
- Ignoring that ATR spikes around scheduled events — quarterly results, Union Budget day, RBI policy announcements — can temporarily distort the reading and shouldn’t be treated as the new normal.
- Confusing ATR with a directional trend indicator — it says nothing about whether price is likely to go up or down, only how much it tends to move.
- Not recalculating position size when ATR expands or contracts meaningfully, leaving the trader over- or under-risking relative to current conditions.
TradeMind logs the market volatility context at the time of entry for every trade, so you can correlate your performance with the ATR regime you were actually trading in as part of your journal entries.