What is ATR?
Average True Range, or ATR, is an indicator that expresses the market's degree of volatility over a defined period as a single number. Unlike most indicators, ATR doesn't indicate price direction; it only tells you how much the market is currently moving around, which is what makes it a key tool in risk management.
How it's calculated
First, each candle's “true range” is calculated, which is the largest of three values: the distance from the candle's high to its low, the distance from the candle's high to the previous candle's close, or the distance from the candle's low to the previous candle's close. ATR then calculates a moving average of that true range, usually over a 14-period window.
How to read the chart
A rising ATR reading means market volatility is increasing, whether to the upside or the downside; a falling reading means the market is calming down. High ATR is usually accompanied by major news, big breakouts, or heightened market excitement, and low ATR is often a sign of a ranging or resting market.
Trading signals
ATR is rarely used to generate a direct buy or sell signal; its main use is in setting a dynamic stop loss and position size. Many traders space their stop loss a multiple of ATR away, instead of a fixed number, so they don't get stopped out too early in a volatile market and don't take on unnecessary risk in a calm one.
Strengths and limitations
ATR is a neutral, reliable tool for gauging volatility, but since it doesn't show direction, it should always be used alongside trend- or momentum-detection tools, not as a standalone indicator for deciding trade direction.
Practical tip
Size your trades based on ATR, not on a fixed percentage of capital that ignores volatility; in markets with a high ATR, a smaller size makes more sense, and in markets with a low ATR, a slightly larger size is more reasonable.