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📉 Volatility·ATR

Complete Guide to ATR Volatility
— How to Use Stop Loss and Risk Levels

ATR is a thermometer of volatility. It quantifies how much a stock moves in a day and explains how to use it for setting stop loss criteria and classifying risk levels.

💡 Key Takeaway — ATR is the size of daily price fluctuations (a thermometer of volatility). It measures not the direction but 'how much it swings' to set stop loss levels and classify risk levels — volatility is the size of risk.

What is ATR?

ATR (Average True Range) is a volatility indicator that quantifies how much a stock moves in a day. It was devised by Welles Wilder and looks at 'the size of the fluctuations' rather than direction. A +5% move is a big event for a normally calm stock, while it is routine for a stock that usually swings — ATR corrects for this difference.

Calculation Method — True Range

First, we calculate the 'True Range' for the day. The largest value among the following three:

  • Today's high - Today's low
  • |Yesterday's close - Today's high|
  • |Yesterday's close - Today's low|

Including yesterday's close is key as it reflects gaps (opening price jumps). This True Range is typically averaged over 14 days to get the ATR. To compare between stocks, we normalize it using ATR% = ATR ÷ Current Price × 100.

Where is it Used — Stop Loss and Risk Levels

  • Setting Stop Loss — By setting a stop loss line according to stock volatility, such as "Entry Price - (ATR × Multiplier)", you can reduce the chances of being stopped out by normal fluctuations.
  • Risk Classification — Stocks with high ATR% will have larger account fluctuations even with the same weight. Volatility is the size of risk.
Using DawnScan — ATR% is used for risk level (flag) determination. Stocks with excessively high ATR% (e.g., over 9%) are classified as 'caution/high risk' due to their high volatility, indicating to users the associated risks.

Setting Stop Loss with ATR

The basic formula is Stop Loss = Entry Price - (ATR × Multiplier). By adjusting the ATR multiplier, you can create stop loss criteria that match the stock's volatility.

  • Multiplier 1.5× — Short-term trading/tight stop loss (minimizing allowed fluctuations)
  • Multiplier 2.0× — Standard for general swing trading
  • Multiplier 3.0× — High volatility stocks/long-term swing (absorbing daily noise)

Example: ATR = $2.00, Entry Price $50, Multiplier 2× → Stop Loss = $50 - $4 = $46. Unlike fixed percentage stop losses, ATR-based stop losses reflect the actual volatility of the stock, reducing unnecessary stop outs (whipsaws).

The Dual Nature of High ATR

A high ATR means both opportunity and risk are significant. High volatility can lead to substantial profits, but conversely, if it moves against you, losses can occur just as quickly. ATR is not about "buy/sell" but rather "this stock swings this much, so respond accordingly" as a measure of risk.

Alongside Other Signals

ATR (size of volatility) pairs with Bollinger Squeeze (volatility contraction) — capturing the squeeze and gauging the scale of volatility after a breakout using ATR. Check it alongside ADX and RSI. For the overall flow, refer to pre-breakout early signal overview and methodology.

Warning — ATR only indicates the size of risk and does not guarantee direction or profit. All information is for reference only, and investment responsibility lies with the individual.

Check Now

You can check the volatility and risk levels of each stock in Today's Scan.

Frequently Asked Questions

What is ATR?

ATR (Average True Range) is a volatility measurement indicator devised by Welles Wilder, which is the average of the True Range over the recent N days (usually 14 days). True Range is the largest value among ① Today's high - low, ② Yesterday's close - Today's high, ③ Yesterday's close - Today's low. It accurately reflects the actual price fluctuations, including gaps.

How is ATR% calculated?

ATR% is a normalized indicator expressed as a percentage by dividing ATR by the current stock price. (ATR ÷ Current Price) × 100. For example, if a stock's closing price is $100 and its 14-day ATR is $5, then ATR% is 5%. This normalization allows for volatility comparisons between stocks with different price ranges.

How does DawnScan utilize ATR?

In DawnScan, ATR% is used for determining risk levels. If ATR% is over 9%, it indicates high daily volatility and becomes one of the trigger conditions for caution levels. Additionally, ATR is often used for setting stop loss criteria (e.g., below 2×ATR compared to entry price) or position sizing (Risk Allowance ÷ ATR).

Is a high ATR always risky?

Not necessarily. A high ATR simply means that the price fluctuations are large, and stocks with strong momentum naturally have a high ATR. The issue arises when entering without a stop loss criterion relative to the volatility. Knowing the ATR allows you to anticipate how much this stock can swing in a day, enabling you to respond without psychological turmoil.
🔵
Bollinger Band Squeeze
Volatility contraction viewed alongside ATR
📊
RSI Momentum
Combining volatility + momentum
⚡
Gap Up Breakout
Measuring risk with ATR when a gap occurs

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