ATR (Average True Range)
ATR measures average price volatility over a period. It's used to size stops dynamically — a volatile stock needs a wider stop, a quiet stock a tighter one.
Definition
ATR, developed by J. Welles Wilder, measures the average range of price movement over N periods (typically 14). It's a pure volatility measure — no directional signal. Traders use ATR multiples for stop placement (e.g., 1.5× ATR below entry). This adapts stops to current volatility instead of using arbitrary dollar amounts. A $3 stop on a $100 stock means something different from a $3 stop on a $20 stock — ATR normalizes this.
Formula
ATR = Moving Average of True Range, where True Range = Max of (High − Low, |High − Prev Close|, |Low − Prev Close|)
Example
Stock with 14-day ATR of $2. A 1.5× ATR stop below entry at $100 = stop at $97.