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Average True Range Indicator (ATR): Formula & Calculation
By Bajaj Broking Team
February 02, 2026
8 mins read
News
Synopsis:
Average True Range (ATR) is a statistical measure used for determining the volatility of a market's asset prices through various methods including stocks, commodities and indices. The ATR is calculated as the average price movement in an asset for its previous 14 days, taking into account gaps in pricing. ATR helps explain changes in volatility and supports risk understanding. However, it does not indicate whether prices may rise or fall.
Designed by J. Welles Wilder Jr., the Average True Range (ATR) is a tool for assessing volatility within financial markets. ATR was initially created as a commodity trading indicator, but after becoming available to the public it quickly became very popular and was used for many different kinds of financial instruments, such as equities and equity indices.
The ATR measures the average movement of an asset’s price on a daily basis over a specific period of time (usually 14 days), and it provides insights into the volatility of an asset; however, it does not indicate the direction of the asset's price. Instead, it focuses only on volatility.
ATR uses a concept called true range. This includes daily highs, daily lows, and the previous closing price. As a result, ATR captures price gaps and sudden movements more accurately.
What is the Average True Range?
Average True Range measures how much an asset’s price moves during a given time period. It is used across stocks, commodities, and market indices. When ATR values increase, price movement becomes wider. When ATR values fall, price movement becomes limited. Therefore, ATR focuses only on volatility and not on price direction.
To calculate ATR, the true range is used. The true range is the highest of the three values. These include the difference between today’s high and low prices. It also includes price gaps from the previous closing price. A 14-day moving average of these values is then calculated. This method reflects real market activity more clearly.
Additional Read: Fundamentals of Technical Analysis
Formula of Average True Range
The ATR formula is given below:
Current ATR = [(Prior ATR x (n-1)) + Current TR)]/ n – ATR Formula 1
In this formula:
‘n’ stands for the number of periods. Typically, we take 14 days as ‘n’ to calculate ATR.
‘Current TR’ is the true range of the price in the current period.
‘Prior ATR’ is the average true range of the price in the previous period.
‘Current ATR’ stands for the average true range of the price in the current period.
In the event, that we take 14 days as a period, ‘n’ will be equal to 14, and ‘n-1’ will be 13.
However, suppose the prior ATR is not provided, how to calculate Current ATR, then? In that case, you can calculate the Current ATR using the following formula:
[(Summation of the true range of the price over a period)/n] – ATR Formula 2
Additional Read: What is Supertrend Indicator?
How to Calculate Average True Range?
The ATR is a measure of market volatility based on both daily price movement and gaps. First, determine each day's True Range (TR). TR is calculated by taking the highest value of the following three calculations for each trading day:
Current High - Current Low; Current High - Previous Close; Current Low - Previous Close.
For example, let's say you have a stock with TR values of ₹2 each day for 14 days. Adding TR together gives ₹28 and dividing it by the number of days, which is 14, means you will have an initial ATR of ₹2.
Now, let's say your previously calculated ATR was ₹2 and the current day’s TR is ₹3. To take the TR into account on your new ATR, multiply the previous ATR by 13, add the current day’s TR, and divide it by 14.
Importance of the ATR Indicator
The Average True Range helps explain how actively prices are moving. It focuses on volatility rather than direction. This adds useful context to price behaviour.
Key points that explain its importance include:
Identifies unusual price movement: ATR highlights periods when prices move more than usual. This makes changes easier to notice.
Includes price gaps: Unlike a single-day range, ATR considers the previous closing price. Therefore, overnight gaps are captured clearly.
Reflects real market conditions: A price range may look small during the day. On the other hand, real volatility goes up when there is a big gap from the last close.
ATR is a better way to see how prices change during trade sessions in general.
Advantages of the ATR
The Average True Range offers a simple way to understand price behaviour. It focuses only on volatility and keeps the interpretation clear. This makes it suitable across different market conditions.
Key advantages include:
Tracks changes in volatility: ATR helps explain whether price movement is expanding or slowing down.
Supports trend context: Rising volatility often appears during active price phases. Falling volatility may show reduced price movement.
Easy to build: ATR only uses simple price info and doesn't do any complicated maths. It is simple to comprehend.
Accessible to many: ATR is shown immediately on most trading platforms. This means that you can focus on perception instead of maths.
Additionally, ATR makes things clearer without adding extra complexity.
Strategies Using Average True Range
Average True Range can help make sense of how prices change. ATR bands are often used in this way. These bands change based on how volatile the market is.
Important points are:
Making ATR bands: Moving averages are used to plot ATR bands. A fixed multiple of ATR is added and subtracted.
Upper and lower limits: The upper band is placed two times the ATR above the moving average. The lower band is placed twice below it.
Reading price behaviour: When prices move outside these bands, volatility has increased. This highlights changing market conditions.
Risk management context: Higher volatility often leads to wider price swings. Stop levels are adjusted to reflect this movement.
Limitations of Average True Range
Average True Range provides helpful volatility information. However, it also has limits. Understanding these helps maintain balance.
Some important limits are:
Open to different ideas: Different people in the market may interpret ATR numbers in different ways. So, context is very important.
Single values need comparison: One ATR reading does not explain the change on its own. Comparing it with past values adds clarity.
No trend direction: ATR measures how much prices move. It does not show whether prices may rise or fall.
It needs supporting signs: ATR works best when used with other tools. It doesn't give a full picture of the market by itself.
These points help make sure that ATR is used in a way that is reasonable.
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Published Date :
02 Feb 2026
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Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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