The ATR Indicator: Measuring Price Volatility

The true range of one day

The simplest measure of a day's movement is the high minus the low. But if the stock opened with a gap away from yesterday's close, that misses part of the move. So the true range takes the largest of three numbers:

1. High − lowThe range within the day itself.
2. High − yesterday's closeIn absolute terms, to capture a gap up.
3. Low − yesterday's closeIn absolute terms, to capture a gap down.

ATR is a Wilder-smoothed average of the true range, usually with a setting of 14. The first value is a plain average of the first 14 sessions; after that each new session gets one part in 14 and the previous value keeps the rest. It is the stock's "normal" daily movement, in currency.

Compare in percent, not in currency

Stock A costs 10 EGP with an ATR of 0.40, so ATR equals 4% of the closing price. Stock B costs 60 EGP with an ATR of 1.20, only 2%. Although B's ATR is larger in currency, A is the more volatile relative to its price.

ATR and stop distance

If a stop loss sits closer to the price than one ordinary day's movement, ordinary daily swings alone can hit it without the bigger picture changing. That is why many people measure stop distance in multiples of ATR rather than a fixed number.

In FoudaLens, when the engine computes a technical stop in the "trend continuation" state, that stop is never closer than 1.5 × ATR to the entry price. In the example above, that means a distance of at least 0.60 for stock A.

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