ATR
Average True Range (ATR) measures the average price range of an asset over a specified period, accounting for overnight gaps, making it a measure of market volatility rather than price direction. ATR is used on NSE Nifty and Bank Nifty charts to contextualise the typical daily price movement and to size positions proportionally.
ATR was developed by J. Welles Wilder alongside the RSI. The true range for each period is the largest of three values: the current high minus the current low, the absolute value of the current high minus the prior close, and the absolute value of the current low minus the prior close. Including the prior close captures the impact of overnight gaps, which are common on NSE after significant after-hours news from global markets.
ATR is typically calculated as a smoothed average of the true range over 14 periods (the default). A 14-day ATR for Nifty 50 of 200 points would mean that, on average, Nifty moved approximately 200 points between its high and low over a daily session in the prior 14 days. This provided a concrete, empirical measure of the market's recent volatility in absolute point terms.
ATR was used by Indian traders for position sizing and stop-loss placement. Setting a stop-loss at a distance of 1.5x or 2x ATR from the entry price ensured that the stop was placed beyond the typical daily noise, reducing the probability of being stopped out by random intraday price fluctuation rather than a genuine adverse move. This approach was more scientifically grounded than using arbitrary fixed-point stops.
In portfolio management, ATR-based position sizing — allocating smaller positions to high-ATR instruments and larger positions to low-ATR instruments — was used to equalise the volatility contribution of each position. A high-ATR stock would receive a smaller allocation so that its daily price swing contributed roughly the same absolute P&L impact as a low-ATR stock with a larger allocation.
ATR does not signal direction. A high ATR indicates that the market has been moving widely, but does not indicate whether those moves were predominantly up or down. ATR is a pure volatility measure, and its directional context must be derived from other indicators. Confusing ATR expansion with a directional signal led to misinterpretations, particularly in markets that were volatile but non-trending.