The Average True Range Indicator and Volatility

When a stock goes through bouts of volatility, the uncertainty can make trade decisions tough for many traders. Indicators that are reliable under smoother conditions can miss changes in risk levels when financial markets are under pressure. Traders need a range designed for volatility.

Average True Range (ATR) is a technical indicator that helps traders gain some perspective on a stock's historical volatility, rather than just recent daily changes that might make it seem more volatile than it typically is. ATR measures how volatile a stock has been, on average, over a specific period of time, smoothing it out into a single number expressed as a dollar amount. It looks at total variation, including price gaps that might not show up in other technical indicators like a simple moving average.

ATR is most useful for helping traders set target and stop levels on new orders and on stocks a trader owns and plans to exit. There are a few things to know about how the ATR indicator works, including the time period it typically examines and how to potentially set exit targets and stop orders, as well as where to find the indicator on the thinkorswim^® platform.

Average True Range measures the degree of price movement rather than just the direction, and it includes the effect of price gaps—big differences between a stock's closing price one day and its opening price the next. In volatile markets, which can be caused by anything from big news events to busier-than-usual trading activity, gaps are more likely to occur.

That's important because some assets have stronger responses to market changes than others, and changes in the stock price can be misleading if you're focused on the present. How popular a stock is, meaning how frequently shares change hands, will affect it too. After all, a $10 move in a $100 stock is less significant than a $10 move in a $20 stock. If the $100 stock moved $5 the next day, and the $20 stock only moved $1, the more expensive stock might seem more volatile on the surface. But ATR helps account for that discrepancy, looking back at a set number of periods and averaging out the average price. Even if both stocks end up having a $5 ATR, it would mean the $20 stock is more volatile, on average.

The thinkorswim platform lets you chart the ATR of a stock for a set period of time. To do it, select the Charts tab, then select the stock you want to review. Next, select Edit studies, which is represented by the flask icon. Finally, select ATR.

The time period will be based on the time period you're using for the chart—a daily chart will average the daily trading price, while a minute chart will look at intraday prices. The thinkorswim platform default setting is to look back at 14 periods, but you can adjust it to the number of periods you want to average. A 14-period lookback on a daily chart will calculate the average daily price range over the last 14 trading days, while a five-minute chart will calculate the average five-minute price range during the last hour and 10 minutes. (You might notice the word "WILDERS" next to the 14; that's for J. Welles Wilder, who developed the ATR indicator.)

Here's the Average True Range with a 14-day lookback time frame on a daily, one-year chart for Nvidia (NVDA) from April 2024 through March 2025. As always, this is an example, not a recommendation.

Average True Range can give some perspective on the volatility of one stock against another by comparing a stock's ATR as a percentage of its share price to see how it varies over time. In late March 2025, Nvidia's ATR of $7.20 was 6.2% of its $115.74 share price. Meanwhile, the ATR of Johnson & Johnson was $2.73, 1.7% of its $162.84 share price the same day. For perspective, the Average True Range for the S&P 500^® index, a diversified index that's likely to be less volatile than a single stock, was 100.34, which was 1.8% of its 5,614.56 price.

The insights from Average True Range contribute to trade planning. Knowing how volatile a stock tends to be, and the average amount its shares move in a single day, can be useful in setting stop and limit orders when placing trades. For short-term orders, a trader may want to use the equivalent of one ATR when setting a stop order level. One ATR may not give the trader enough wiggle room stay in the trade, especially for a stock that has shown great volatility. If the stop is too tight, the trader might exit before the trend of the stock breaks.

To reduce this risk, some traders might calculate their downside using a 1.5–2X ATR. This offers more wiggle-room in the stock price but might force the trader to take on a smaller position size to maintain comfortable risk on the trade. On longer-term positions, traders might use even greater variations of the ATR or consider the ATR on a weekly or monthly time frame. In such cases, the ATR would quantify the weekly or monthly spread of the stock.

With Nvidia, for example, the stock has recently been trending down, after spending most of 2024 on the rise. If a trader sees a potential profit opportunity based on fundamental or technical indicators, they might buy at its current price of $115.88. In most cases, a trader would use support and resistance levels to place a target. To help protect the trade, the trader could use one ATR to set a stop order at $108.68, just in case the trade doesn't go their way. Given that Nvidia has shown a moderately high level of volatility, using its Average True Range proves useful in setting a stop order.

An investor with a long-term time horizon may not want to set an upside limit but may worry about getting stuck with a risky position in a changing market. They may opt for a trailing stop order that adjusts as the stock's price moves. If the investor sets the stop loss at three ATR, which would initially be $94.14, that stop would adjust as the market moves, keeping some downside protection in place without sacrificing appreciation potential.

Depending on their trading plan, some traders may find that using the Average True Range indicator instead of a straight percentage or resistance level to calculate stops allows a trade more time to potentially work.

Average True Range is a volatility indicator that is particularly useful in unsettled markets because it reflects the effects of recent price activity in ways that other measures don't. It includes gaps created by overnight news events and trading that add to volatility levels, and it can give traders perspective on exactly how volatile a stock has been. This makes it useful as a guide for setting stops that respect risk management but recognize that other measures may be too tight for a fluctuating market. Even fundamental investors may find this little bit of technical analysis to be useful in gyrating markets.