Average True Range (ATR)
A volatility indicator that tells you how much a stock or index typically moves in a single session — essential for sizing stops and positions.
Definition
Average True Range (ATR) is a technical indicator developed by J. Welles Wilder that quantifies market volatility. It does not indicate price direction — instead, it captures the degree of price movement by averaging the true range over a specified number of periods, typically 14. Traders often use ATR alongside directional indicators such as ADX or the Supertrend to build complete trading systems.
Why it matters
In India's equity and derivatives markets, volatility can shift dramatically around events like RBI policy announcements, Union Budget, or quarterly earnings. ATR captures these regime changes in a single number, helping traders adjust their behaviour accordingly. When ATR expands, the market is moving more aggressively and stop-losses should be wider to avoid getting shaken out of valid trades. When ATR contracts, the market is consolidating and tight stops become viable. For F&O traders on NSE, ATR also informs how many lots to trade — a higher ATR on BankNIFTY, for instance, may warrant reducing position size to keep rupee risk constant.
Formula
The True Range (TR) for any session is the largest of three values: (1) Current High minus Current Low, (2) the absolute value of Current High minus Previous Close, and (3) the absolute value of Current Low minus Previous Close. This accounts for overnight gaps that a simple High-Low range would miss. ATR is then the smoothed average of TR over N periods using Wilder's smoothing method: ATR = [(Prior ATR × (N-1)) + Current TR] / N. The standard period is N = 14.
Example
Suppose NIFTY 50 has a 14-period ATR of 80 points in a hypothetical session. A swing trader entering a long position at 22,000 might place a stop-loss at 22,000 − (2 × 80) = 21,840, giving the trade a 160-point buffer. If the trader's maximum acceptable loss per trade is ₹8,000 and each NIFTY futures lot is 25 units, the rupee risk per lot is 160 × 25 = ₹4,000. The trader could therefore take up to 2 lots while staying within budget. This ATR-based position sizing adapts automatically as market volatility changes — no manual recalibration needed.
Spot volatility shifts in real time
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