ATR (Average True Range)

### Where it comes from J. Welles Wilder introduced ATR in his 1978 book *New Concepts in Technical Trading Systems*. He built it for commodities, which gap overnight and go limit, where a plain high minus low badly understates what really happened. So he defined **True Range** as the greatest of three numbers: - the current high minus the current low - the absolute value of the current high minus the previous close - the absolute value of the current low minus the previous close The last two reach back to yesterday's close, so a gap counts as movement. That is the entire trick, and it is why ATR beats "average candle size" as a noise measure. ATR is then Wilder's smoothed average of True Range. On the standard 14-period setting, current ATR = (prior ATR x 13 + current TR) / 14. StockCharts notes Wilder himself often ran an 8-period version, so 14 is a convention, not a law. ### What it can and cannot tell you It is smoothed and backwards-looking. It reports the noise that *has* been there, not the noise that is coming. After one violent news candle, ATR stays elevated for days even if the market has since gone dead, so the stop it suggests can be far too generous exactly when conditions have calmed. It is also an absolute number, not a relative one. StockCharts is explicit that ATR values are not comparable across instruments, because a higher-priced instrument will always print a bigger ATR than a cheap one regardless of relative volatility. To compare across markets you need ATR Percent, which is simply (ATR / Close) x 100 and puts everything on one scale. And it has no direction. A rising ATR does not mean up. ### Using it without fooling yourself Stop distance as an ATR multiple is a published, established method, not a personal superstition. The Chandelier Exit (Chuck LeBeau, featured in Alexander Elder's books) trails a long stop at the 22-day high minus 3 x ATR(22), deliberately giving the trade a buffer of three times recent volatility. The mistake beginners make is halfway adoption: they widen the stop to 1x ATR and leave the lot size exactly where it was. An ATR stop only works if position size moves inversely with it. Otherwise you have not managed risk, you have simply agreed to lose more.