The Average True Range (ATR) is a technical analysis indicator that measures market volatility by decomposing the entire range of an asset price for a given period. Developed by J. Welles Wilder Jr., the ATR does not indicate price direction but rather the degree of price movement. It is widely used for setting stop losses, determining position sizes, and identifying breakout opportunities.

The True Range for each period is the greatest of three values: the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. The formulas are: TR = max(High - Low, |High - Previous Close|, |Low - Previous Close|). The ATR is then a smoothed moving average of the True Range values over the chosen period, typically 14 days.

Traders commonly use ATR to set stop losses at a multiple of the ATR value. For example, a trader might place a stop loss at 2x ATR below their entry price. If a stock's ATR is $3.50, the stop would be $7.00 below the entry. This adaptive approach ensures that stop losses account for the stock's natural price fluctuations, avoiding premature exits while still managing risk. Higher ATR values indicate greater volatility and suggest wider stops, while lower values point to calmer price action.