ATR: Measuring Volatility for Stop Placement

ATR turns a stock's typical daily movement into a single dollar number — the basis for a stop-loss that actually fits the stock.

How ATR is calculated and used

ATR (Average True Range) looks at each period's 'true range' — the largest of: today's high minus today's low, today's high minus yesterday's close, or yesterday's close minus today's low — then averages that over a lookback period, commonly 14 days. It says nothing about direction, only about the size of typical price swings.

A worked comparison

Two stocks, both trading around $100:

Same price, but Volatile Corp. typically moves 4x as much in a day. A fixed-dollar stop the same distance from entry on both would be far too tight for Volatile Corp. — likely triggered by ordinary noise — and unnecessarily wide for Steady Co.

A common approach sets the stop at a multiple of ATR from entry — say, 2x ATR. That's a $2.40 stop distance on Steady Co. and $9.60 on Volatile Corp., scaling the stop to each stock's own normal behavior instead of one flat number applied everywhere.

Key takeaway: A flat '2% stop' on every trade ignores that 2% is routine noise for a high-ATR stock and an unusually large move for a low-ATR one — ATR-based stops adjust for that automatically. ATR can also shift suddenly around news or earnings, so a stop sized on yesterday's calmer ATR may be too tight for tomorrow.

ATR gives you the number; the next lesson uses it to actually place a stop-loss on a trade.

This lesson is educational content explaining standard technical-analysis concepts, not personalized investment or trading advice.