The formula
true range = max(high − low, |high − prev close|, |low − prev close|) · ATR = average of them
Where it comes from
True range measures how far an asset moved in a period, including any gap from the previous close. Averaging it gives a plain measure of typical movement, which is what makes it useful for setting stops that are neither absurdly tight nor pointlessly wide.
How to work it out by hand
- For each candle, take the largest of: high minus low, high minus previous close, low minus previous close
- Average those true ranges over the chosen number of periods
- Multiply the ATR by your chosen multiplier
- Subtract from the entry for a long stop, add for a short one
What is worth knowing
The argument for an ATR stop is that a fixed percentage stop is arbitrary: 2% is a normal morning in one asset and a crisis in another. Sizing the stop by recent movement means you get stopped out by genuine trend changes rather than by ordinary noise. Multipliers between 1.5 and 3 are the usual range; below that you are inside the noise. Note that ATR says nothing about direction and it lags, so it expands after volatility has already arrived. Combine it with the position size calculator: a wider ATR stop means a smaller position for the same risk, which is the correct response to a more volatile asset.