Average True Range
Measures how much an instrument moves on average over a set period — pure volatility with no directional bias.
Description
Average True Range was developed by J. Welles Wilder and introduced alongside RSI and ADX in his 1978 book. Unlike most indicators, ATR makes no statement about direction — it only measures how large recent price moves have been. This makes it uniquely useful for position sizing, stop placement, and gauging whether a breakout has meaningful range behind it.
How It Works
True Range = the greatest of: (high − low), |high − previous close|, |low − previous close|. This accounts for gaps — a gapped open that moves significantly also generates a large True Range. ATR = Wilder’s smoothed average of True Range over N periods (default: 14). The result is expressed in price units, not percentages.
How to Read It
A rising ATR means recent candles have been larger than usual — volatility is expanding. A falling ATR means price is moving in smaller increments — volatility is contracting. ATR does not tell you whether price is going up or down. Traders use it as a multiplier: “place my stop 2× ATR below the entry” automatically adjusts stop distance to current market conditions.
Common Uses
- Position sizing (risk a fixed dollar amount / ATR = position size)
- Stop-loss placement (2–3× ATR from entry)
- Assessing breakout significance (a move larger than 1× ATR is notable)
- Identifying volatility compression before potential breakouts
Caveats
ATR is a tool, not a signal generator. It tells you how much, not which direction. Very low ATR periods can persist for a long time before a breakout materializes — ATR compression is a necessary but not sufficient condition for an imminent move. ATR is expressed in absolute price units, so comparing ATR across different instruments requires converting to a percentage of price.