Wilder's classic volatility measure. Not a read on the crowd's mood, but on the volume of its argument.
ATR — Average True Range — was introduced by J. Welles Wilder in his 1978 book New Concepts in Technical Trading Systems, the same volume that gave technical analysis RSI, ADX, Parabolic SAR, and DMI. The weight of Wilder's contribution to modern charting is hard to overstate.
What ATR measures is volatility — the size of price movement — not its direction. ATR itself emits no entry signal. But in the architectural decisions of a trade — stop width, position size, comparison across instruments — ATR plays a role that is almost impossible to substitute.
The True Range — TR — captures a day's movement while accounting for any gap from the prior close.
Formula
TR = max(H − L, |H − prevC|, |L − prevC|)
H is the day's high, L the low, prevC the previous close. TR is the largest of the three.
Why include the prior close? Gaps. On a day that opens far from the previous close, a naive H−L underestimates the true variation. TR corrects for that.
ATR averages TR over n periods (standard: 14).
Formula
ATR = (1/n) × Σ TR
Wilder used a proprietary smoothing — "Wilder smoothing" — rather than a simple average, but most modern charting packages use SMA or EMA. The substantive results are similar.
How to Read
OANDA:USDJPY
ATR's most useful application is setting stop-loss distance in proportion to current volatility.
A rule like "place the stop at 2×ATR below entry" gives you, automatically:
Where a fixed-pip stop ignores the volume of the market's voice, an ATR-based stop breathes with the market.
When comparing positions across instruments, sizing by price alone is naive. Sizing by ATR is closer to "equal risk".
This compensates for differences in each instrument's natural movement and produces positions of comparable risk. For traders working across multiple markets it is indispensable.
When ATR is extremely depressed, breakout strategies tend to produce more false signals. A filter — "no entries when ATR < its 20-day average" — can cut losses in dead-water periods.
The classic complement is the Bollinger Band "squeeze": ATR contracting, then expanding, marking the moment when volatility releases.
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