How ATR Measures Price Ranges and Gaps
Calculate ATR true range using the high, low, and previous close. Understand direction versus volatility, comparisons relative to price, and the limits of using ATR for loss management.
ATR measures the size of price movement by averaging true ranges calculated from the previous close and the current high and low. Because it includes gaps, it can differ from the day’s high minus low alone. A higher ATR means larger price swings, not a higher probability of gains.
The daily range and its distance from the previous close
True range, or TR, is the largest of three values: the day’s high minus low, the absolute difference between the day’s high and the previous close, and the absolute difference between the day’s low and the previous close. When trading opens with a large gap, TR can be large even if the intraday high-low range is small, because the distance from the previous close is large. ATR smooths these ranges; the commonly used Wilder method differs from a simple average. When switching trading apps, match both the period and averaging method before comparing readings.
Distinguish won-denominated values from relative volatility
An ATR of 500 won for a stock priced at 10,000 won and an ATR of 500 won for one priced at 100,000 won represent the same monetary range but different sizes relative to price. For a relative comparison, also check ATR divided by the price at the same point in time. Specify which price is used as the denominator and the bar interval. Putting daily and weekly ATR in the same table and treating the smaller value as safer creates an error because the time horizons differ. A historical average range is neither a maximum future move nor a normal-distribution confidence interval.
Calculate risk size without assuming guaranteed execution
You can evaluate using a multiple of ATR as a price cushion, but that multiple is an assumption to be chosen according to the investment objective and validation results. With a fixed loss budget, a wider assumed price range implies a smaller position. However, sharp gaps or insufficient liquidity can prevent execution at the intended price, making actual losses larger than calculated. ATR also rises after volatility increases, so a calm previous day’s reading may not adequately capture today’s risk. This is why stock-specific event calendars and the ability to place orders matter as well. Record the reference date of the ATR used so a value updated after a sharp move is not confused with an earlier judgment.
Worked example
Hypothetical example: If the previous close is 100 won, today’s high is 112 won, and its low is 108 won, the TR candidates are 4 won, 12 won, and 8 won, making TR 12 won. Applying 14-period Wilder smoothing to the previous ATR of 5 won gives a new ATR of (5×13+12)÷14=5.5 won. It is below today’s TR of 12 won because it averages several periods. Do not read the day’s abrupt move and the accumulated average as the same measure.
What to check
- Find the largest of the three ranges that incorporate the previous close.
- Check the ATR smoothing method and bar interval.
- Calculate the ratio to price when comparing stocks.
- Do not treat an ATR multiple as a guarantee of the actual maximum loss.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.