What Is ATR?
The Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder Jr. It measures the average range between high and low prices over a specified period, accounting for gaps. ATR does not indicate direction — only the degree of price movement.
How ATR Works
ATR calculates the "true range" for each period as the greatest of:
- Current high minus current low
- Absolute value of current high minus previous close
- Absolute value of current low minus previous close
The ATR is then the moving average (typically 14 periods) of these true range values. A rising ATR signals increasing volatility; a falling ATR signals decreasing volatility.
Why It Matters for Traders
ATR is essential for position sizing and stop-loss placement. A common approach is setting stop-losses at 1.5–2x ATR from entry, ensuring your stop accounts for normal price fluctuation. ATR-based position sizing adjusts your trade size inversely to volatility — smaller positions in volatile markets, larger in calm ones.
How Perps Traders Use This
For CEX perpetual futures, treat atr (average true range) as context around entries, exits, and risk, not as a standalone signal. Pair it with funding, open interest, and liquidation heat so one indicator does not drive the whole book.
Formula and Worked Example
Example numbers only (not a live quote).
If your account equity is $10,000 and you risk 0.5% per idea, the cash risk budget is $50. With a stop 1% away from entry on a linear USDT-margined perp, notional size is about $5,000 before leverage optics. Size from stop distance first, then pick leverage that fits the margin mode.
Common Mistakes
- Treating a single print of atr (average true range) as a trade signal without checking funding, open interest, and your liquidation price.
- Mixing venue conventions (coin-margined vs USDT-margined, cross vs isolated) and reading the wrong mark.
- Copying example numbers from a glossary into live size without checking the current book depth and fee schedule.
- Ignoring related terms that change the meaning of the print on a given day.
