## What Is the Average True Range (ATR)?

In 1978, J. Welles Wilder introduced this technique as an indicator of volatility. The disparity between a stock’s highest and lowest price on any given day is known as its range, and it is frequently used as a volatility indicator for all future contracts.

## Generic Formula to Calculate Average True Range

The stock’s daily high, daily low, and daily close price are needed to calculate the average true range.

**Daily Range = High Price – Low Price**

To consider the closing price of the previous day:

**True Range = MAX[(High-Low),ABS(High-Prev. Close),ABS(Low-Prev. Close)]**

It chooses the maximum among the three differences:

- The present high minus the present low
- The absolute value of the present high minus the previous close
- The absolute value of the present low minus the previous close

The calculation of the average true range for the first period is:

**ATR**

_{t}**= (1/n) ∑**

_{i}TR

_{i}Welles proposed using a smoothed average of 14 days. So, in the above formula, **n** equals **14**. The average of the true range is calculated for the first 14 days, and from that result, the first average true range is returned. The next ATRs will be calculated using an exponential moving average with the following formula:

**ATR**

_{t}**= ( ATR**

_{t-1 }*** (n-1) + TR**

_{t}**) / n**

**ATR**** _{t}** is the present average true range.

**ATR**

**is the previous average true range.**

_{t-1}**n**represents

**14**(for a 14-day moving average).

**TR**

**is the present true range.**

_{t}**ATR**

_{t}**= ( ATR**

_{t-1 }*** 13 + TR**

_{t}**) / 14**

The standard value of **n** is **14**, as the average volatility over the previous 14 days is shown by ATR.

**Read More:** How to Calculate 7 Day Moving Average in Excel

This dataset showcases a report on the **Stock Price of the “ABC” Company**. It includes the **High**, **Low**, and **Close** prices of stock from **24 March 2021** to **26 April 2021**. Freeze Panes were used.

### Step1 – Determine the Present High Minus the Present Low

**Steps:**

- Select
**F5**and enter the following formula.

`=C5-D5`

**C5** and **D5** represent the High and Low prices of the corresponding day.

- Press
**ENTER**.

- At the bottom-right corner of
**F5**, the cursor will display a plus**(+)**sign. It’s the**Fill Handle**tool. Double-click it.

This is the output.

**Read More: **How to Get Average Time in Excel

### Step 2 – Calculate the Present High Minus the Previous Close

Use the second part of the formula for the true range.

**Steps:**

- Select
**G6**and enter the following formula.

`=ABS(C6-E5)`

**C6** and **E5** represent the present high price and the previous close price. The **ABS **function returns the absolute value of their difference. It always returns a positive value.

- Press
**ENTER**.

**Read More: **How to Calculate Average, Minimum And Maximum in Excel

### Step 3 – Compute the Present Low Minus the Previous Close

Use the third part of the formula for the true range.

**Steps:**

- Select
**H6**and enter the following formula.

`=ABS(D6-E5)`

- Press
**ENTER**.

Here, cells **G5** and **H5** are blank because there is no previous day before these days.

**Read More:** How to Calculate Monthly Average from Daily Data in Excel

### Step 4 – Calculate the True Range

** Steps:**

- Select
**I5**and enter the following formula.

`=MAX(F5:H5)`

**F5:H5** represents values of high-low, high-previous close, and low-previous close.

The **MAX **function returns the maximum value among data in **F5**:**H5**.

- Press
**ENTER**.

Check if the formula returns the correct answer in **I6** . **5.37**, **1.48**, and **3.89** are displayed in **F6**, **G6**, and **H6**.

**5.37** is the greatest value. The function also returns this value.

**Read More: **How to Calculate Average of Multiple Ranges in Excel

### Step 5 – Calculate the Average True Range

** Steps:**

- Select
**J18**and enter the following formula.

`=AVERAGE(I5:I18)`

The **AVERAGE **function returns the arithmetic mean of the arguments.

- Press
**ENTER**.

**J5:J17** was kept blank.

Go back to the generic formula: the ATR for the first period is calculated using the arithmetic mean of consecutive **14** days. 14 days of data were stored in cells **I5:I18**.

To determine the ATR for the following days:

- Select
**J19**and enter the following formula.

`=(J18*13+I19)/14`

The formula is explained in the previous section.

- Press
**ENTER**.

## How to Calculate ATR Stop Loss

ATR can assist you in determining where to set your stop loss. A correctly positioned stop loss avoids losing too much and acting as an insurance. Your stop loss will be broader if you’re dealing with a stock with a high ATR because it will experience larger daily price swings.

You can utilize multiples of the ATR reading (2x/3x), and choose it based on the state of the market and your prior knowledge.

Below is a part of the previous dataset with calculated ATR values.

The second multiple of the ATR value was used here. Calculate the stop loss for each date:

**Steps:**

- Create a new column:
**Stop Loss**. - Select
**G5**and enter the following formula.

`=E5-2*F5`

- Press
**ENTER**.

You purchased stock on **13 April 2021** at the close price: **$258.49**.

You set a stop loss at **$249.26: ** if the price of this stock falls on this, you won’t take any further risk and sell it.

If you buy it on **21 April** at a price of **$260.58**, you will set the stop loss at **$252.07**.

**Read More: **How to Calculate Average of Multiple Columns in Excel

## Practice Section

Practice here.

Download the following Excel workbook.

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