Average True Range (ATR)

Measuring Volatility with ATR

The Average True Range (ATR) is a volatility indicator that tells you how much a stock typically moves in a given period. Unlike most indicators, ATR does not indicate price direction — it measures the degree of price movement, regardless of whether the stock is going up or down.

How ATR Is Calculated

The "True Range" for a single day is the greatest of:

• Current high minus current low
• Absolute value of current high minus previous close
• Absolute value of current low minus previous close

The ATR is then typically a 14-day average of the True Range values.

What ATR Tells You

• High ATR — The stock is experiencing high volatility. Prices are swinging widely day to day.
• Low ATR — The stock is in a period of low volatility. Price movements are small and calm.
• Rising ATR — Volatility is increasing, often seen at the start of a new trend or during market uncertainty.
• Falling ATR — Volatility is decreasing, often seen during consolidation periods.

Using ATR for Position Sizing

One of the most practical uses of ATR is determining position size and stop-loss placement. The idea is to risk the same amount in KES terms regardless of how volatile the stock is:

1. Determine your risk per trade (e.g., KES 5,000)
2. Calculate the ATR of the stock (e.g., KES 2 for SCOM)
3. Set your stop loss at 2x ATR below your entry (KES 4 below)
4. Position size = Risk / Stop distance = KES 5,000 / KES 4 = 1,250 shares

This method ensures you buy fewer shares of volatile stocks and more shares of stable stocks, keeping your risk consistent.

ATR on the NSE

NSE stocks vary widely in volatility. Safaricom (SCOM) typically has a lower ATR relative to its price compared to smaller-cap stocks. Knowing the ATR helps you set realistic expectations for how much a stock might move and avoid being stopped out by normal daily fluctuations.