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.