Average True Range (ATR): Measuring Bursa Volatility
The short answer
Average true range (ATR) is a volatility indicator developed by J. Welles Wilder that averages the “true range” of price movement, typically over 14 periods [1]. It measures how much price tends to move, not which way, and because it is expressed in price units it cannot be compared across counters unless converted to a percentage of price [1][2].
What is true range?
True range is the greatest of three distances for a period: the current high less the current low, the absolute difference between the current high and the previous close, and the absolute difference between the current low and the previous close [1].
Why three? A plain high-low range misses movement that happens between sessions. Wilder created the measure to capture this “missing” volatility, such as the gaps that occur when a market opens well above or below the previous close [1].
Absolute values are used so that every result is positive, because the aim is to measure distance rather than direction [1]. On a daily Bursa chart, each candle therefore has one true range figure that includes any overnight gap.
How is ATR calculated?
ATR is an average of true range values, smoothed over time. StockCharts explains that it is typically based on 14 periods, and the first 14-day ATR is the simple average of the first 14 true range values [1]. After that, each new value incorporates the previous period’s ATR to smooth the data [1].
The steps are:
- Work out the true range for each daily candle.
- Average the first run of true range values to get the starting ATR.
- For each later day, blend the new true range with the previous ATR.
Hypothetical illustration: suppose Company A’s last three true ranges are RM0.02, RM0.04 and RM0.03. In this illustration a simple average of those three would be RM0.03. A real ATR uses the full period and the smoothing step. These figures are invented to show the idea only.
StockCharts also cautions that ATR values depend on how far back a calculation begins, so figures from a short data set may not match those on a chart exactly [1].
Why compare ATR as a percentage of price?
Because ATR is absolute, a higher-priced stock will tend to have a higher ATR than a lower-priced one, regardless of how volatile each really is [2]. StockCharts states that large price movements for one security can also make long-term ATR comparisons impractical [1].
The fix is ATR percent (ATRP): divide the ATR by the closing price and multiply by 100 [2]. This puts securities on the same scale, making it easier to compare very different prices [2].
Hypothetical illustration: suppose Company A trades at RM0.30 with an ATR of RM0.03, and Company B trades at RM10 with an ATR of RM0.30. The raw figures make Company B look ten times as volatile, yet the percentages are 10% and 3%, so Company A is moving more relative to its price. The numbers are invented for the comparison only.
How is ATR used in risk management?
ATR is used as a gauge of how far a price tends to move, which some investors consider when judging how much room a position needs and how large it should be. It does not choose the position for you.
StockCharts notes that ATR is not directional: it shows volatility, not whether price will rise or fall [1]. A high ATR can accompany a rise or a fall. Because of that, an ATR figure should sit alongside the rest of your plan, including how much you can afford to lose.
Hypothetical illustration: if a counter’s typical daily range were RM0.05 and you wanted a stop-loss that ordinary movement would not trigger, a gap of several multiples of that range might be one way to think about it. This is an illustration of an idea, not a recommendation or a rule.
For broader habits, read our guide to stock market risk management in Malaysia and the glossary entry on maximum drawdown.
What are its limits around price gaps?
ATR includes gaps by design, but it also smooths them. StockCharts says methods two and three of true range handle gaps and inside days [1]. Since each new ATR blends in the previous value, one large gap raises the figure for several periods afterwards, even after trading has calmed [1].
Other limits to keep in mind:
- It is backward-looking. It describes past movement and does not forecast future moves.
- The period is a choice. A different setting gives a different line, and StockCharts notes that the 14-period default can be adjusted [1].
- It says nothing about direction, news or the company’s fundamentals.
On Bursa Malaysia, thinly traded counters can produce uneven gaps, so their ATR can swing with a few trades. Compare it with Bollinger Bands, another volatility tool, and review both on the technical chart using end-of-day data.
Frequently asked questions
What is true range?
It is the greatest of the current high less the current low, the current high less the previous close, and the current low less the previous close, using absolute values [1].
How is ATR calculated?
It averages true range values, typically over 14 periods, and smooths each new value using the previous ATR [1].
Why use ATR as a percentage of price?
Because ATR is tied to price, a percentage lets you compare a RM0.30 counter with a RM10 one on the same scale [2].
Does a high ATR mean price will fall?
No. ATR measures the size of movement and not its direction [1].
Sources
- StockCharts ChartSchool — Average True Range (ATR): true range definition, 14-period calculation, smoothing, gaps, non-directional, absolute values
- StockCharts ChartSchool — Average True Range Percent (ATRP): ATR divided by closing price times 100, comparing securities with different prices
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Disclaimer: Finworld provides market education and research tools only. This is not investment advice. Market data is end-of-day.