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ATR (Average True Range)

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Display Type: Oscillator | Complexity: Beginner | Best For: Volatility Analysis, Stop Loss Placement, Position Sizing

Average True Range (ATR) is a technical indicator developed by J. Welles Wilder Jr. in 1978 that measures market volatility. Unlike directional indicators that focus on price movement, ATR quantifies how much an asset typically moves in a given period, making it an essential tool for risk management, position sizing, and understanding market conditions.

What is ATR? #

ATR measures the average range of price movement over a specified number of periods, typically 14. It provides a single number that represents the “normal” volatility for an asset, helping traders understand whether current market conditions are more or less volatile than usual.

The indicator oscillates above zero with no upper limit—higher values indicate higher volatility, while lower values suggest calmer market conditions. ATR is expressed in the same units as the asset’s price (dollars for stocks, pips for forex, points for indices).

Key Uses: #

  • Stop Loss Placement: Set stops based on normal market volatility
  • Position Sizing: Adjust trade size based on volatility levels
  • Volatility Analysis: Understand current market conditions
  • Entry Timing: Identify low-volatility periods before breakouts
  • Risk Management: Calculate risk per trade more accurately
  • Trailing Stops: Dynamic stop adjustment based on volatility

How ATR Works #

True Range Calculation: #

True Range (TR) is the largest of:

  1. Current High – Current Low
  2. |Current High – Previous Close|
  3. |Current Low – Previous Close|

The True Range captures the full extent of price movement, including gaps between sessions.

ATR Formula: #

ATR = Moving Average of True Range over N periods

Most commonly:

  • Period: 14 (Wilder’s original recommendation)
  • Smoothing Method: Exponential Moving Average or Wilder’s Smoothing

Wilder’s Smoothing Method: #

  • First ATR = Average of first 14 True Range values
  • Subsequent ATR = [(Previous ATR × 13) + Current TR] ÷ 14

ATR Characteristics: #

Non-Directional: ATR only measures volatility magnitude, not direction Lagging Indicator: Based on historical price ranges Relative Measure: Best compared to the asset’s own historical ATR values Price-Dependent: Higher-priced assets naturally have higher ATR values

ATR Interpretation #

Volatility Levels: #

ATR Condition Market Implication Trading Consideration
High ATR Increased volatility Wider stops, smaller positions
Low ATR Decreased volatility Tighter stops, potential breakout setup
Rising ATR Volatility expanding Trend may be accelerating
Falling ATR Volatility contracting Market consolidating

Historical Context: #

  • Compare current ATR to 50-period or 200-period averages
  • ATR 50% above average = High volatility environment
  • ATR 50% below average = Low volatility environment

Standard ATR Settings #

Default Parameters: #

  • Period: 14 (most common)
  • Smoothing: Wilder’s method or EMA
  • Applied To: High, Low, Close prices

Alternative Settings by Trading Style: #

Trading Style ATR Period Best For Characteristics
Scalping 5-10 Quick volatility reads More sensitive, frequent changes
Day Trading 14 Standard setting Balanced responsiveness
Swing Trading 14-21 Medium-term volatility Smoother readings
Position Trading 21-50 Long-term volatility Very stable readings

Market-Specific Considerations: #

Forex: 14-period standard, measured in pips Stocks: 14-period, consider stock price level Crypto: 10-14 period due to higher volatility Commodities: 14-21 period depending on contract

Trading Applications #

1. Stop Loss Placement #

Method: Set stops based on ATR multiples Conservative Approach: 1.5 × ATR from entry Moderate Approach: 2.0 × ATR from entry Aggressive Approach: 1.0 × ATR from entry

Example:

  • Stock price: $100
  • Current ATR: $2.50
  • Long entry: $100
  • Stop loss: $100 – (2.0 × $2.50) = $95

2. Position Sizing #

Risk-Based Position Sizing:

  • Determine risk per trade (e.g., 1% of account)
  • Calculate stop distance using ATR
  • Position size = Risk Amount ÷ Stop Distance

Example:

  • Account: $10,000
  • Risk per trade: 1% = $100
  • ATR: $2.00, using 2× ATR stop = $4.00
  • Position size: $100 ÷ $4.00 = 25 shares

3. Volatility Breakout Strategy #

Setup: Look for low ATR periods followed by expansion Entry Signal:

  • ATR below recent average (low volatility)
  • Price breaks key resistance/support
  • ATR starts rising (volatility expanding)

Target: 2-3× current ATR from breakout point Stop: 1.5× ATR below breakout level

4. Trailing Stop Strategy #

Dynamic Stop Adjustment:

  • Long position: Stop = High – (2× ATR)
  • Short position: Stop = Low + (2× ATR)
  • Adjust stop only in favorable direction
  • Never widen stops

ATR-Based Indicators #

ATR Bands #

Construction:

  • Upper Band: Price + (2× ATR)
  • Lower Band: Price – (2× ATR)
  • Similar to Bollinger Bands but uses ATR instead of standard deviation

ATR Trailing Stops #

Calculation:

  • Bull market: Stop = Close – (Multiplier × ATR)
  • Bear market: Stop = Close + (Multiplier × ATR)
  • Common multipliers: 2.0-3.0

ATR Percent (ATR%) #

Formula: ATR% = (ATR ÷ Close Price) × 100 Use: Compare volatility across different price levels Benefit: Normalizes ATR for percentage-based analysis

Combining ATR with Other Indicators #

ATR + Moving Averages #

Strategy: Use ATR to set appropriate stop distances from MA support/resistance

  • MA bounce entry: Stop at MA – (1.5× ATR)
  • MA breakout: Stop at previous MA level or entry – (2× ATR)
  • Trending market: Trail stop at MA – (2× ATR)

ATR + Bollinger Bands #

Volatility Confirmation:

  • BB squeeze + low ATR = Strong consolidation
  • BB expansion + rising ATR = Volatility breakout confirmation
  • ATR can help set targets beyond BB extremes

ATR + RSI #

Risk-Adjusted Momentum:

  • RSI overbought + high ATR = Higher reversal risk
  • RSI oversold + low ATR = Potential low-risk entry
  • Divergences more significant with ATR context

ATR + Support/Resistance #

Dynamic Level Adjustment:

  • Key level ± (1× ATR) = Zone rather than exact line
  • Breakout confirmation: Price beyond level + ATR buffer
  • False breakout: Failure to hold beyond level + ATR

Market Condition Analysis #

High Volatility Periods #

ATR Characteristics:

  • ATR well above historical average
  • Rising ATR values
  • Frequent gap openings

Trading Adjustments:

  • Wider stop losses (2.5-3× ATR)
  • Smaller position sizes
  • Shorter holding periods
  • Avoid tight range strategies

Low Volatility Periods #

ATR Characteristics:

  • ATR below historical average
  • Declining or flat ATR
  • Compressed price ranges

Trading Adjustments:

  • Tighter stops (1-1.5× ATR)
  • Prepare for breakout trades
  • Range-bound strategies
  • Accumulate positions for coming expansion

Volatility Transitions #

Expansion Phase:

  • ATR rising from low levels
  • Often coincides with trend changes
  • Breakout opportunities increase

Contraction Phase:

  • ATR falling from high levels
  • Market entering consolidation
  • Mean reversion opportunities

ATR Patterns and Signals #

ATR Expansion Signals #

Pattern: ATR making new highs Implication: Strong trend likely continuing Strategy: Trend-following approaches work best

ATR Contraction Signals #

Pattern: ATR making new lows Implication: Market preparing for next move Strategy: Breakout preparation, range trading

ATR Divergences #

Price vs. ATR:

  • Price making new highs, ATR declining = Trend weakening
  • Price making new lows, ATR declining = Selling exhaustion
  • Look for confirmation with other indicators

Common ATR Mistakes #

Mistake 1: Using ATR for Direction #

Problem: Trying to predict price direction with ATR Solution: ATR only measures volatility; use other indicators for direction

Mistake 2: Static Stop Distances #

Problem: Using same stop distance regardless of volatility Solution: Always adjust stops based on current ATR readings

Mistake 3: Ignoring ATR Trends #

Problem: Not considering whether ATR is rising or falling Solution: Factor ATR direction into trading decisions and risk management

Mistake 4: Wrong ATR Multiples #

Problem: Using inappropriate ATR multiples for strategy Solution: Backtest to find optimal multiples for your approach

ATR Settings by Timeframe #

Timeframe ATR Period Stop Multiplier Position Sizing Use
1-minute 14 1.0-1.5× High-frequency trading
5-minute 14 1.5-2.0× Scalping strategies
15-minute 14 2.0-2.5× Day trading
1-hour 14 2.0-3.0× Intraday swings
4-hour 14 2.5-3.5× Swing trading
Daily 14 2.0-3.0× Position trading
Weekly 14 3.0-4.0× Long-term investing

FAQs #

What does ATR tell you about a stock or market? #

ATR tells you how much volatility to expect in normal market conditions. High ATR values indicate the asset typically moves in large ranges, while low ATR suggests smaller, more predictable movements. This information is crucial for setting appropriate stops and position sizes.

How do you use ATR for stop losses? #

Multiply current ATR by a factor (typically 1.5-3.0) and subtract from your entry price for long positions (add for short positions). This creates volatility-adjusted stops that are less likely to be hit by normal market noise while still protecting against significant adverse moves.

What is a good ATR value? #

There’s no universally “good” ATR value—it depends on the asset and timeframe. Compare current ATR to the asset’s historical average: ATR significantly below average suggests low volatility (potential breakout setup), while ATR well above average indicates high volatility (requiring wider stops).

Should ATR be high or low for trading? #

Both conditions offer opportunities: Low ATR often precedes significant price moves (good for breakout strategies), while high ATR indicates strong trends in motion (good for trend-following). The key is adjusting your strategy and risk management to match current volatility conditions.

How often should you check ATR? #

Check ATR whenever planning trades for stop placement and position sizing. For active traders, monitor ATR daily or before each trading session. For longer-term strategies, weekly ATR reviews are usually sufficient to adjust risk management parameters.

Can ATR predict price direction? #

No, ATR is non-directional and only measures volatility magnitude. It cannot predict whether prices will go up or down. Use ATR in combination with directional indicators like moving averages, trend lines, or momentum oscillators for complete market analysis.

What’s the difference between ATR and standard deviation? #

Both measure volatility, but ATR uses the True Range (capturing gaps and limit moves) while standard deviation measures how much prices deviate from their average. ATR is generally more practical for setting stops and measuring day-to-day trading volatility.

Tips for Success #

  1. Match ATR Period to Strategy: Shorter periods for active trading, longer periods for position trading
  2. Use ATR Multiples Consistently: Stick to tested multipliers rather than changing them based on emotions
  3. Compare to Historical ATR: Always evaluate current ATR against recent averages for context
  4. Combine with Price Action: ATR works best when combined with support/resistance and trend analysis
  5. Adjust for Market Conditions: Widen stops in high-volatility environments, tighten in low-volatility periods
  6. Regular ATR Reviews: Update your volatility expectations regularly, especially after major market events
  7. Position Size Accordingly: Larger positions in low-volatility, smaller positions in high-volatility conditions
  8. Don’t Ignore ATR Direction: Rising ATR suggests increasing volatility; falling ATR suggests decreasing volatility
  9. Backtest ATR Parameters: Test different ATR periods and multipliers for your specific trading approach
  10. Risk Management Priority: Never risk more than planned, regardless of what ATR suggests for position sizing

Conclusion #

Average True Range stands as one of the most practical and essential technical indicators for modern trading. Its ability to quantify normal market volatility makes it indispensable for risk management, position sizing, and strategy adaptation. Unlike directional indicators that attempt to predict where prices will go, ATR focuses on how much they’re likely to move—information that’s often more reliable and actionable.

The beauty of ATR lies in its simplicity and universal applicability. Whether you’re a day trader needing precise stop placement or a long-term investor looking to size positions appropriately, ATR provides objective, mathematical guidance for managing risk. Its integration with other technical analysis tools enhances overall trading effectiveness by adding a crucial volatility dimension to market analysis.

Success with ATR comes from understanding that volatility is not constant—it expands and contracts in cycles. By monitoring these volatility cycles and adjusting trading parameters accordingly, traders can improve their risk-adjusted returns while avoiding the common mistake of using static risk management in dynamic markets.

Remember: ATR doesn’t predict the future, but it helps you prepare for the range of outcomes most likely to occur. Use it as the foundation of your risk management system, always in conjunction with sound trading principles and comprehensive market analysis.

Technical Indicator, Volatility Analysis, Volatility Indicator