What is Average True Range (ATR)?

ATR is a way to measure the average price movement over a given period of time. It basically tells how volatile is the price action. It captures the entire price move, including the price gaps. A high ATR shows aggressive price move, while a low ATR shows quiet price movement. For instance, if we say that Nifty50 has an ATR of 150 points on daily timeframe, it means that the Index moves, on an average, 150 points in a single day. Now, if the ATR increases to 200 points, the price action shows increased volatility, as the price spread of the Index has increased by 50 points when compared to the earlier 150 points—ATR.

Increased ATR shows that the price swings have become volatile, that may be due to sudden buying demand for the stock (assuming the stock is not thinly traded). Sometimes, stocks that have low average daily trade volume i.e. thinly traded stocks, can show spike in ATR as price can swing wildly on small buying/selling.

Traders use ATR to help place a technical stop loss. Traders who like to keep tight stop losses, prefer stocks that have low ATR. While some successful traders like Qullamaggie widely use high ATR stocks for momentum/swing trade. These are generally more risky, but can be far more rewarding if traded with sound trading rules!