Average True Range (ATR)
Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a specified period. Learn what it measures, when to trust it, and how to avoid weak signals.
Primary keyword
ATR
Works best for
Setting stop losses that respect volatility
Failure condition
Determining direction (ATR is directionless)
Plain-English explanation
ATR measures volatility - how much an asset typically moves. It doesn't tell you direction, just the "size of the swings."
What it tells you: - High ATR: Market is volatile, moving a lot - Low ATR: Market is calm, not moving much - Rising ATR: Volatility increasing (usually during trends) - Falling ATR: Volatility decreasing (usually during consolidation)
Practical uses: 1. Stop Loss Placement: Use 1.5-2x ATR for stops to avoid noise 2. Position Sizing: Lower position size when ATR is high 3. Breakout Confirmation: Real breakouts usually have expanding ATR 4. Profit Targets: Use ATR multiples for realistic targets
Example: If stock XYZ has ATR of $2.50, setting a stop $0.50 away is too tight. It will get hit by normal price movement.
How it works
ATR calculates the true range (largest of: current high-low, current high-previous close, or current low-previous close) and averages it over a period (typically 14). This accounts for gaps and gives a true picture of volatility.
When it works best
- Setting stop losses that respect volatility
- Position sizing based on volatility
- Comparing volatility across different assets
- Identifying when to expect big moves
- Filtering out noise in trading signals
When it fails
- Determining direction (ATR is directionless)
- After news events (sudden ATR spike)
- Comparing assets with different prices
- Very short-term trading (use shorter periods)
- As a standalone trading signal
Common mistakes
- Using ATR to predict direction (it can't)
- Setting stops without considering ATR
- Using same ATR multiple for all assets/timeframes
- Ignoring ATR when it suddenly changes
- Not recalculating ATR regularly
Pro tips
- Use ATR trailing stops: trail by 2x ATR from recent high/low
- Low ATR often precedes big moves (the calm before storm)
- Adjust position size inversely to ATR
- Compare current ATR to historical average
- Use ATR bands for dynamic support/resistance
FAQs about ATR
What is Average True Range (ATR) in trading?
Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a specified period. ATR calculates the true range (largest of: current high-low, current high-previous close, or current low-previous close) and averages it over a period (typically 14). This accounts for gaps and gives a true picture of volatility.
When does ATR work best?
Setting stop losses that respect volatility Position sizing based on volatility Comparing volatility across different assets Identifying when to expect big moves Filtering out noise in trading signals
When does ATR fail or become unreliable?
Determining direction (ATR is directionless) After news events (sudden ATR spike) Comparing assets with different prices Very short-term trading (use shorter periods) As a standalone trading signal
What mistakes should traders avoid with ATR?
Using ATR to predict direction (it can't) Setting stops without considering ATR Using same ATR multiple for all assets/timeframes Ignoring ATR when it suddenly changes Not recalculating ATR regularly
Use ATR in a live workflow
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