Average True Range (ATR)

ATR was introduced by J. Welles Wilder in 1978. It starts with true range, which is the largest of three numbers for each candle: the high minus the low, the high minus the previous close, and the previous close minus the low, the last two taken as absolute values. Using the previous close means gaps are counted, which a plain high-low range would miss.

ATR is the average of true range over a set number of candles, 14 by default. Wilder's method smooths it: the new ATR equals the previous ATR times 13, plus the current true range, divided by 14. The result is in price units. An ATR of 45 on a 15-minute Nifty chart means recent candles have covered about 45 points each, gaps included.

ATR says nothing about direction. It rises in a sharp fall as readily as in a rally. Traders use it to set stop-loss distance and position size in proportion to current movement. A stop-loss of 1.5 times ATR adapts on its own: wider on a fast Bank Nifty morning, tighter in a dull afternoon. It also lets you compare instruments that trade at very different prices.

The common mistake is comparing ATR across timeframes or instruments as raw numbers. A daily ATR of 300 and a 5-minute ATR of 25 describe different things. Another is treating a high ATR as a buy or sell signal. It is a ruler, not a signal. ATR also lags: it is an average, so one quiet hour will not pull it down at once.