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ATR and protective distance: measuring movement before defining risk

Average True Range, or ATR, measures the recent size of price movements, including gaps. It has no upward or downward direction. Comparing a proposed protective distance with ATR helps describe how large that distance is relative to recent movement; it does not identify a universally safe level.

Student Wyckoff editorial team · Published · Reviewed 2026-10-23

Educational material with fictional examples, prepared with AI editorial assistance. This is not personalized investment advice.

True range includes the previous close

For one candle, true range is the largest of three distances: high minus low, the absolute difference between high and previous close, and the absolute difference between low and previous close. Including the previous close captures movement that an intraday range can miss after a gap.

A common 14-period Wilder ATR updates as (13 × previous ATR + current true range) / 14 after initialization. The result is expressed in price units. An ATR of 2 dollars does not mean a 2% move unless the reference price happens to be 100 dollars. It also does not specify the likely direction.

A gap changes the volatility calculation

Assume the previous close is 100 dollars, today’s high is 105 and the low is 102. The three distances are 3, 5 and 2 dollars, so true range is 5. If the previous 14-period ATR was 2, the updated ATR is (13 × 2 + 5) / 14 = 2.21 dollars, rounded. Using the unrounded ATR, an illustrative distance of twice ATR is about 4.43 dollars. With an assumed 50-share position, that distance represents roughly 221.43 dollars before costs, gaps or execution differences; it is not a guaranteed loss ceiling.

Recent movement does not contain every future shock

ATR can rise sharply after news and remain elevated because of smoothing. A fixed multiple chosen without reference to price structure may sit inside an important zone or much farther away than intended. Wider distance increases money at risk for an unchanged position size. Orders can also execute beyond their trigger price when markets gap.

Compare distance, structure and units separately

Use available completed daily, weekly or monthly candles to inspect gaps and the nearby structural boundary. If calculating ATR separately, retain the timeframe, period and smoothing method. Compare the proposed distance in both dollars and ATR units. This educational calculation does not claim that the platform calculates ATR or places protective orders.

Primary sources

Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.

Sources checked: 2026-10-23

Your next practical step

Examine completed ranges and gaps before interpreting an illustrative protective distance.

Open the first-chart instructions ↗