Average True Range (ATR)
The Average True Range, or ATR, is a volatility indicator that helps traders understand how much an asset typically moves over a certain period. Unlike many tools that focus on direction, the ATR focuses purely on price movement—specifically, how wide the range is from high to low.
Originally introduced by J. Welles Wilder, the ATR doesn’t generate trade signals by itself. Instead, it serves as a powerful tool to manage risk, set realistic stop-loss levels, and spot changes in market volatility.
How the ATR Works
The ATR is calculated by taking the greatest value of the following three:
The current high minus the current low
The absolute value of the current high minus the previous close
The absolute value of the current low minus the previous close
These values represent the True Range for each candle. Then, the average of those ranges is calculated over a specific period—usually 14.
Here’s a quick summary:
Here’s a quick summary:
When the ATR rises, it means the market is becoming more volatile. When it falls, volatility is calming down.
| Component | What It Means |
|---|---|
| High – Low | Daily price range |
| High – Previous Close | Captures overnight gaps |
| Low – Previous Close | Captures sharp downward gaps |
| Final ATR Value | Average of true ranges over set period |
How Traders Use It
While the ATR doesn’t point to direction, it plays a crucial role in many strategies. It helps traders size positions more accurately, set stop-losses that reflect market noise, and avoid getting stopped out by random price spikes.
Here are the most common ways to use it:
Volatility-Based Stops:
Many traders use a multiple of ATR (like 1.5× or 2×) to set stops. This ensures the stop isn’t too tight in a volatile market.
Position Sizing:
In high-volatility environments, smaller positions may be used to limit risk.
Volatility Shifts:
A rising ATR can signal that a big move is about to happen—or already underway. A falling ATR may suggest consolidation.
Example Setup
Let’s say you’re trading a forex pair and the current ATR is 0.0015 (15 pips). Rather than setting a tight stop-loss just 5 pips below your entry, you decide to use 1.5× ATR, giving you a 22.5-pip stop.
That stop reflects the pair’s actual volatility and keeps you in the trade even if there’s short-term noise.
On the other hand, if ATR suddenly starts rising over several candles, it could indicate a breakout or that a news-driven move is underway. You might avoid fading the move and instead look to trade with the surge.
Pros and Cons of Using ATR
Pros
Excellent for setting volatility-adjusted stop-losses
Helps avoid being stopped out too early
Adapts to all timeframes and asset classes
Useful in trending and ranging markets
Cons
Doesn’t show trend direction or entry signals
Can lag in extremely volatile or news-driven markets
Requires pairing with other tools for trade setups
When to Use the ATR
The ATR is a must-have for any trader who values smart risk management. Whether you’re day trading, swing trading, or holding longer-term positions, the ATR keeps you grounded in reality. It doesn’t just help you spot volatility—it helps you respond to it with better decisions.
When volatility spikes, ATR rises—and that’s your cue to adjust your stop, reduce size, or stay out altogether. When it drops, you know the market is quieter and your risk parameters can shift accordingly.
The Average True Range doesn’t tell you where price will go, but it gives you the confidence to handle whatever comes next. Now that we got this covered, lets explore the Volatility Index (VIX)
