Average True Range (ATR)

What is the Average True Range?

The Average True Range (ATR), another Wilder creation from his 1978 book, is the industry standard for measuring market volatility. Unlike range-based indicators that only look at the high and low of a single session, the ATR also accounts for gaps and overnight moves through the concept of "True Range" — the greatest of (current high minus current low), (current high minus previous close), or (current low minus previous close). The ATR then smooths this value over a lookback period, typically 14 candles. The resulting number is not a directional signal; it is a pure volatility metric expressed in the instrument's price units. Modern algorithmic and risk-managed trading relies heavily on ATR for position sizing, stop placement, and volatility-adjusted trailing stops.

How It Works

Each candle's True Range is the largest of three possible ranges, which ensures gaps are captured correctly. The ATR smooths these ranges using Wilder's modified moving average, giving a running estimate of how much the instrument typically moves in one bar. On EUR/USD, a daily ATR reading of 0.0080 means price typically moves roughly 80 pips per day — critical information for sizing stops and targets. Traders use multiples of the ATR to set protective stops (commonly 1.5 or 2 ATR below entry), to size positions so that a standard stop represents a fixed percentage of capital, and to trail stops dynamically as volatility changes.

Formula

True Range (TR) = max(
    High - Low,
    |High - Previous Close|,
    |Low - Previous Close|
)
ATR = Wilder smoothing of TR over N periods (typically 14)

How to Read the ATR

• 1Rising ATR: volatility is increasing, wider stops required
• 2Falling ATR: volatility is compressing, tighter stops acceptable
• 3ATR spikes after news events — always adjust position size during high impact data
• 4Use 1.5-3× ATR for stop loss placement depending on strategy
• 5ATR does not indicate direction — use with trend indicators
• 6Compare current ATR to long-term average to assess volatility regime
• 7In forex, daily ATR in pips is a quick proxy for typical daily range

Strengths and Weaknesses

Example Strategy

This example is educational, not financial advice. Always backtest any strategy and manage risk with appropriate position sizing.

Related Indicators

Brokers That Offer the ATR

Any broker with MetaTrader 4, MetaTrader 5, or cTrader supports the ATR as a standard indicator. Below are our top EU-regulated picks.

Frequently Asked Questions