ATR (Average True Range): formula, settings and how to use it for stop loss
What is the ATR indicator?
The ATR indicator, short for Average True Range, measures how much an instrument typically moves per candle. It does not say which way price is going. It only answers: how big are the candles right now compared with normal?
J. Welles Wilder introduced ATR in 1978, in the same book as RSI and ADX. He traded commodities, where overnight gaps were common, so he designed a range measure that counts gaps too. That makes ATR especially useful for NIFTY and BANKNIFTY, which often gap at the 9:15 IST open after global news.
ATR is shown in points, not percent. An ATR of 25 on a 5-minute NIFTY chart means an average 5-minute candle has recently covered about 25 points including gaps.
ATR = Wilder's smoothed average of TR: ATRt = (ATRt−1 × (N − 1) + TRt) ÷ N (default N = 14)
How the ATR formula works
First, each candle gets a true range: the largest of three distances. These are high minus low, the gap from the previous close up to the high, and the gap from the previous close down to the low. Without the gap terms, a candle that gaps 80 points and then moves only 10 would look quiet when it was not.
Wilder's smoothing
ATR then averages true range using Wilder's smoothing, which is like an exponential average with a long memory. The first ATR value is a simple average of the first 14 true ranges. After that, each new ATR equals the previous ATR times 13, plus today's true range, divided by 14.
Illustration
Previous ATR is 20 points. The new 5-minute candle has a high-low of 18 points but it gapped up so its high is 34 points above the previous close, so its true range is 34. New ATR = (20 × 13 + 34) ÷ 14 ≈ 21. One big candle nudges ATR up gradually rather than doubling it.
How to read average true range
- Rising ATR: candles are getting bigger. Volatility is expanding, often around news, the open, breakouts or expiry-day moves.
- Falling ATR: candles are shrinking. The market is compressing, often before a breakout.
- High ATR is not bullish or bearish: a crash and a rally can both have high ATR.
Compare ATR with its own history, not with another instrument. BANKNIFTY's ATR in points will normally be much larger than NIFTY's simply because its price level and swings are larger. To compare, some traders use ATR as a percent of price.
Intraday ATR pattern
On 5-minute charts ATR usually peaks in the first 30 to 45 minutes after 9:15, quietens into the lunch hours, and often picks up again after 14:30 IST. Knowing this rhythm stops you from reading a normal lunchtime lull as a meaningful signal.
Best ATR settings for NIFTY intraday
The standard 14-period ATR works on most timeframes. Common variations:
| Goal | Timeframe | Setting |
|---|---|---|
| Intraday stops | 5-minute | ATR 14 |
| Faster reaction to opening volatility | 5-minute | ATR 7 to 10 |
| Positional / swing | Daily | ATR 14 or 20 |
A useful habit is to note the daily ATR of NIFTY each morning. If the daily ATR is around 200 points and the index has already moved 190 points by noon, an extended further move is possible but less typical, which helps set realistic expectations for the rest of the day.
ATR stop loss and ATR trailing stop
The most popular use of the ATR indicator is setting a stop that respects current volatility. A fixed 20-point stop can be too wide on a quiet day and far too tight on a volatile one. An ATR stop adapts.
ATR stop loss
Traders often place a stop 1 to 2 × ATR beyond the entry or beyond the swing point that invalidates the idea. With a 5-minute ATR of 20 points, a 1.5 × ATR stop is 30 points beyond the level.
ATR trailing stop (chandelier style)
For trend-following, a trailing stop can be set at the highest high since entry minus 3 × ATR for long positions, or the lowest low plus 3 × ATR for shorts. The Supertrend indicator is built on exactly this ATR band idea, and Keltner Channels use ATR to size their bands.
ATR position sizing
ATR also helps decide quantity. The idea is to keep the rupee risk per trade constant, so that a volatile day means fewer lots, not bigger losses.
If you risk ₹5,000 per trade and the ATR-based stop is 40 points on an instrument worth ₹25 per point per unit, quantity = 5,000 ÷ (40 × 25) = 5 units of exposure, rounded down to what lot sizes allow. On a calmer day with a 20-point stop, the same rule allows more. The risk management and position sizing guide covers this in detail.
Combining ATR with volume and footprint
ATR tells you the size of moves; volume and order flow tell you who is behind them. A breakout candle that is 2 × ATR in size with strong volume and positive delta on the footprint chart shows real participation. The same size candle on thin volume may be a stop run that fades.
ATR contraction near a volume profile high volume node often means the market is balancing. A sudden ATR expansion out of that balance is when traders watch breakout versus fakeout clues most closely.
Worked BANKNIFTY example (illustration)
An illustration with plausible numbers: BANKNIFTY's 5-minute ATR(14) reads 70 points at 9:45 IST after a gap-up open. By 12:30 it has fallen to 38 as the index drifts sideways in a 150-point range.
At 13:10 a candle breaks the range high with a true range of 95 points, about 2.5 × the current ATR, and volume is the highest since the open. A trader studying this breakout might measure a 1.5 × ATR stop, about 57 points, below the breakout level rather than using a fixed number. If price later trends, a 3 × ATR trailing stop from the highest high keeps the trade open through normal pullbacks. Trading F&O carries a high risk of loss, and this example only shows how ATR scales distances to conditions.
Common ATR mistakes
- Reading ATR as a direction indicator. It measures size only.
- Comparing ATR in points across different instruments.
- Using a 1 × ATR stop on a 1-minute chart, which is often inside normal noise.
- Forgetting that ATR lags: after a sudden shock, ATR takes several candles to catch up.
- Ignoring the opening-hour spike when setting intraday stops at 9:20.
Seeing it on the TradingMarble chart
On the TradingMarble chart you can add ATR in its own pane and set its period, then compare candle size with footprint volume and delta at the same time. This helps you see which wide candles came with real participation. Available tools are listed on the features page.
ATR checklist
- Is ATR rising or falling versus the last hour and the last few days?
- Where are we in the session rhythm?
- Is the stop at least 1 × ATR beyond the invalidation level?
- Does quantity keep rupee risk constant?
- Does volume confirm the size of the move?
The average true range will not tell you where price goes next, but it keeps your stops and size honest about how much the market is really moving.
Frequently asked questions
What does the ATR indicator tell you?
The ATR indicator tells you the average size of recent candles, including gaps, in price points. A high ATR means the market is volatile and candles are large; a low ATR means it is quiet. It does not show direction, so traders use it for stop placement, position sizing and spotting volatility contraction or expansion.
What is a good ATR setting for intraday trading?
The default 14-period ATR on a 5-minute chart is a common choice for NIFTY and BANKNIFTY intraday. Some traders use 7 to 10 periods to react faster to opening volatility. Keep one setting and learn how it behaves across normal days, expiry days and news days.
How do you use ATR for stop loss?
Traders place the stop a multiple of ATR beyond the level that would prove the trade idea wrong, commonly 1 to 2 × ATR for intraday trades. A trailing version subtracts about 3 × ATR from the highest high since entry. This adapts the stop to current volatility instead of using a fixed number of points.
Is a high ATR bullish or bearish?
Neither. High ATR only means large candles and high volatility, which can happen in sharp rallies or sharp sell-offs. Direction must come from price structure, trend tools or order flow. ATR is purely a measure of how much the market is moving.
What is the difference between ATR and standard deviation?
ATR averages the true range of each candle, including gaps, so it measures the typical high-to-low size of bars. Standard deviation measures how widely closing prices scatter around their mean, which is what Bollinger Bands use. ATR is generally steadier and is the basis of Keltner Channels and Supertrend.
Why does ATR use true range instead of high minus low?
Because high minus low ignores gaps. If NIFTY gaps up 100 points and then moves only 20 points in the candle, high minus low says 20 while the real movement from the previous close was much larger. True range includes the gap, giving a fairer picture of volatility.