ATR — Average True Range for Volatility and Position Sizing

The Average True Range (ATR) was developed by J. Welles Wilder to measure market volatility. Unlike most indicators that focus on price direction, ATR measures only the degree of price movement — how much a stock typically moves in a given period. ATR is not directional: a high ATR means the stock is volatile (large daily ranges), while a low ATR means it is calm (small daily ranges).

True Range is the greatest of three values: (1) Current High minus Current Low, (2) Absolute value of Current High minus Previous Close, (3) Absolute value of Current Low minus Previous Close. The reason for including the previous close is to account for gaps — if a stock gaps up significantly, the simple high-low range would understate the actual volatility. ATR is then the average of True Range over a period (typically 14 days), using Wilder's smoothing method.

ATR for stop loss placement is one of its most practical applications. Instead of placing stops at arbitrary percentage or dollar levels, use ATR-based stops that adapt to each stock's volatility. A common approach: place your stop loss 2× ATR below your entry price for long positions. For a stock with ATR of 3 EGP, your stop would be 6 EGP below entry. This prevents getting stopped out by normal volatility while still protecting against adverse moves.

Position sizing with ATR ensures consistent risk across all trades. The formula: Position Size = Risk Amount / (ATR × Multiplier). For example, if you want to risk 1000 EGP per trade and the stock has ATR of 5 EGP with a 2× multiplier: Position Size = 1000 / (5 × 2) = 100 shares. This approach means you buy fewer shares of volatile stocks and more shares of calm stocks, keeping your risk per trade constant.

ATR channels (also called Keltner Channels) plot bands at a multiple of ATR above and below a moving average. They work similarly to Bollinger Bands but use ATR instead of standard deviation. ATR channels tend to be smoother and less reactive to individual price spikes. A breakout beyond 2× ATR channel is highly significant — it represents a move larger than what is statistically normal for that stock.

Trailing stops with ATR: As a trade moves in your favor, trail your stop at a fixed ATR distance. For example, use a "chandelier exit" at 3× ATR below the highest high since entry. This gives the trade room to breathe during normal pullbacks while locking in profits as the trend progresses. The Chandelier Exit tightens automatically in low-volatility environments and loosens in high-volatility ones.

ATR in the Egyptian market: Egyptian stocks can have widely different volatility profiles. Blue-chip stocks like CIB (COMI) might have ATR of 1-2% of price, while smaller stocks can have ATR of 5-10% of price. Using ATR-based position sizing automatically adjusts for this difference. FoudaLens uses ATR in its volatility scoring component — lower ATR relative to trend strength is considered favorable. This is not financial advice.