ATR

How far this thing typically moves.

Average True Range measures how much a stock moves in a typical period, in rupees. It says nothing about direction. It is a measure of how much room the stock needs. True Range = the largest of: high − low |high − previous close| |low − previous close| ATR = the average True Range over N periods (usually 14) A stock with an ATR of Rs 20 typically swings Rs 20 in a day. Placing a stop Rs 5 away is not a tight stop, it is a guarantee of being knocked out by ordinary noise. Setting stops A stop should sit outside normal movement. Two times ATR is a common starting point. Position sizing A high-ATR stock needs a smaller position for the same risk in rupees. Rising ATR The market is getting more volatile. Something is happening. ATR is the least glamorous tool here and the most useful. It is the difference between a stop placed where the trade is genuinely wrong and one placed where the stock breathes.

Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: Charts.