What is average true range (ATR)?
The average true range (ATR) is a technical indicator used to measure market volatility, or how much an asset’s price moves over a specific period.
It was developed by J. Welles Wilder and is widely used in trading to assess price movement intensity.
In simple terms, ATR means how much the price typically moves over time, regardless of direction.
Unlike trend indicators, ATR does not show whether the market is going up or down. It only measures the size of price fluctuations.
How average true range works
ATR is based on the concept of true range, which captures the full price movement of an asset.
True range is calculated using the largest value among:
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Current high minus current low
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Current high minus previous close
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Current low minus previous close
The ATR is then calculated as the average of these values over a set period, typically 14 periods.
This allows traders to understand how active or quiet the market is at any given time.
How to read average true range
ATR values are expressed in price units rather than percentages.
For example:
Key interpretation:
Important: ATR does not indicate direction. A high ATR can occur in both uptrends and downtrends.
How to use average true range in trading
Traders use ATR mainly to manage risk and adapt to market conditions.
Common ways to use average true range:
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Set stop loss levels: ATR helps set dynamic stop losses based on volatility. For example, stop loss = entry price minus ATR × multiplier
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Adjust position size: In high volatility markets, traders reduce position size. While in low volatility markets, they may increase size.
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Identify trading conditions: High ATR suggests active markets. While a low ATR indicates consolidation or ranging conditions.
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Confirm breakouts and momentum: Rising ATR can signal increased momentum during breakouts.
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Avoid tight stop placement: ATR helps avoid stop losses that are too close and get triggered by normal price movement.
Overall, ATR is best used as a risk management and volatility tool, rather than a standalone trading signal.
Advantages and limitations of ATR
Advantages
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Provides clear measurement of volatility
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Useful for stop loss and position sizing
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Works across multiple markets and timeframes
Limitations
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Does not indicate price direction
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Lagging indicator based on past data
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Requires combination with other indicators
Risk Warning: Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
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