ATR (Average True Range)

Difficulty beginner

Definition

ATR measures market volatility by decomposing the entire range of an asset price for a period. Developed by J. Welles Wilder.

Calculation

True Range = max(High - Low, |High - PrevClose|, |Low - PrevClose|)
ATR = EMA(True Range, n)  (typically n=14)

where: High bar high · Low bar low · PrevClose prior bar's close — included so gaps count as range · True Range the larger of the intraday range and the gap-adjusted range · EMA(., n) Wilder-smoothed exponential average over n periods · ATR average true range. does: measures absolute volatility in price units while ignoring direction. Traders size stops as a multiple of ATR (e.g., entry − 2 × ATR for longs) so risk scales with the asset's normal noise, set position size from risk / (ATR multiple) to equalize dollar risk across symbols, and watch rising ATR as confirmation that a breakout has real participation versus a quiet drift.

Trading Applications

Stop-Loss Placement

Common multipliers: - Tight: 1.0-1.5 × ATR - Normal: 2.0 × ATR - Wide: 3.0 × ATR

Practical Guidelines

1. ATR Is Not Directional — Only measures volatility, not direction
2. Adjust for Timeframe — Daily ATR ≠ Intraday ATR
3. Normalize Across Assets — Use ATR% = ATR/Price for comparison
4. Dynamic Stops — ATR stops adjust to changing volatility
5. Volatility Regimes — Compare current ATR to historical average

Next Steps

• Ichimoku Cloud — Comprehensive trend system
• Fibonacci Retracement — Fibonacci levels