Average True Range (ATR)

Average true range, from Welles Wilder, measures recent movement in price points, including gaps, because true range reaches back to the prior close. It is not directional. A high ATR means bars have been large or gappy. It does not say whether the next bar will be up. Traders use it to size stops and positions: a stop of one ATR is a different idea on a calm stock and on a stock that moves 4 percent a day.

Wilder's smoothing means ATR changes slowly. A single news bar lifts it, and it stays lifted until the window forgets that bar. Compare ATR with the stop you intend. If your stop is a fraction of ATR, ordinary noise will hit it. If it is many ATRs away, you are risking more than the recent daily movement, which may be correct for a swing and wrong for a scalp.

Place stops beyond a multiple of ATR from the entry or from a swing, so the stop sits outside ordinary noise. Size the position so the rupee loss at that stop matches the risk budget. Use a rising ATR as a warning that the same point stop now represents less of the typical bar, and either widen it or cut size. Do not use ATR direction as a buy or sell.

Calling a high ATR bearish or bullish. It is unsigned. Also setting a 0.2 ATR stop because the risk looks small, then being stopped by the spread and the next ordinary bar.

ATR is backward-looking. The day volatility doubles, your stop was sized for yesterday. And a 14-day ATR on a stock that gaps on earnings does not describe the earnings bar until after it prints. Recompute after the event.