What Is Average True Range?
Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder that measures the average range between high and low prices over a specified number of periods. Unlike simple range calculations, ATR accounts for gap-ups and gap-downs by using the true range — the greatest of the current high minus low, the absolute value of current high minus previous close, or the absolute value of current low minus previous close.
How Average True Range Works
ATR is typically calculated over 14 periods. A rising ATR indicates increasing volatility, while a falling ATR indicates contracting volatility. ATR does not indicate direction — only the magnitude of price movement. Traders commonly use ATR multiples (e.g., 2x ATR) to set stop-loss distances that adapt to current market conditions rather than using fixed dollar or percentage stops.
Why It Matters for Traders
ATR is the foundation of position sizing and volatility-adjusted risk management. A 2x ATR stop-loss on Bitcoin during a low-volatility consolidation might be $500, but during a volatile breakout it could be $3,000. This dynamic adjustment prevents being stopped out by normal noise while maintaining consistent risk per trade.
