The Average True Range (ATR) measures market volatility โ how much a stock typically moves in a given period. It does not indicate price direction โ it only measures the magnitude of movement. ATR is essential for setting logical stop losses and calculating position sizes.
True Range Calculation
True Range = Maximum of:
1. Current High โ Current Low
2. |Current High โ Previous Close|
3. |Current Low โ Previous Close|
ATR = EMA(14) of True Range values
What ATR Tells You
| ATR Value | Meaning | Action |
|---|---|---|
| Rising ATR | Volatility increasing | Widen stops, reduce position size |
| Falling ATR | Volatility decreasing | Tighten stops, potential squeeze forming |
| High ATR vs historical | Unusually volatile | Be cautious โ avoid entering |
ATR-Based Stop Loss
The most practical use of ATR is setting stop losses that adapt to the stock's volatility. A fixed 2% stop works on a low-volatility stock but will be hit immediately on a high-volatility stock.
ATR Stop Loss Rule:
Stop Loss = Entry Price โ (ATR ร Multiplier)
Conservative: 1.5ร ATR below entry
Standard: 2ร ATR below entry
Wide: 3ร ATR below entry (for positional trades)
Stop Loss = Entry Price โ (ATR ร Multiplier)
Conservative: 1.5ร ATR below entry
Standard: 2ร ATR below entry
Wide: 3ร ATR below entry (for positional trades)
Example
NIFTY at 23,500 | ATR(14) = 180 points
Stop Loss (2ร ATR) = 23,500 โ (2 ร 180) = 23,140
This stop accounts for normal daily fluctuation without being hit randomly.
ATR for Position Sizing
ATR helps calculate how many shares to buy so that your maximum loss per trade stays consistent regardless of which stock you trade:
Position Size Formula
Risk Amount = Capital ร Risk % (e.g., 1% of โน5,00,000 = โน5,000)
Stop Distance = 2 ร ATR
Position Size = Risk Amount รท Stop Distance
ATR Trailing Stop
A trailing stop that adjusts with ATR locks in profits as a trend extends:
Trailing Stop = Highest Price Reached โ (ATR ร 2)
Update the stop upward as price makes new highs
Never move the stop downward
Used in: Supertrend indicator (which is built on ATR)
Update the stop upward as price makes new highs
Never move the stop downward
Used in: Supertrend indicator (which is built on ATR)
NSE-Specific ATR Values (Approximate)
| Instrument | Typical Daily ATR | Implication |
|---|---|---|
| NIFTY 50 | 150โ250 points | Wide stops needed for index |
| BANK NIFTY | 400โ700 points | Very high volatility โ use 15min ATR |
| Large-cap stocks | 1%โ2% of price | Manageable with 2ร ATR stop |
| Mid-cap stocks | 2%โ4% of price | Requires larger position sizing buffer |
