ATR (Average True Range)
Wilder's classic volatility measure. Not a read on the crowd's mood, but on the volume of its argument.
Overview
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.
Calculation
True Range
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 itself
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 Use It
How to Read
OANDA:USDJPY
Sizing stop losses
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:
- A wider stop in volatile conditions
- A tighter stop in quiet conditions
Where a fixed-pip stop ignores the volume of the market's voice, an ATR-based stop breathes with the market.
Normalising position size
When comparing positions across instruments, sizing by price alone is naive. Sizing by ATR is closer to "equal risk".
- Instrument A: ATR = 100, risk budget = 10,000 → 100 units
- Instrument B: ATR = 50, risk budget = 10,000 → 200 units
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.
Filtering low-volatility setups
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.
Reading Market Psychology
Caveats
- No direction: ATR is not an entry signal — always pair with a trend tool
- Backward-looking only: ATR reflects past volatility, not future
- Distorted by gaps: a single abnormal day weighs on the average for a long time
- Session-dependent in 24h markets: in FX, brokers can produce slightly different ATRs from the same underlying price
- n=14 is convention, not gospel: shorter for scalping, longer for swing — adjust to purpose
Related Studies
- Risk Management — ATR is the backbone of position sizing and stop design
- Bollinger Bands — a different angle on volatility contraction and expansion
- Pivot Points — pairs naturally with ATR as a daily range estimator
Related Studies
Risk Management and 'What It Takes to Win' — Beyond Method Quality
The single most important fact that emerges from surveying 98 methods. The math of risking ≤2% per trade, the prospect-theory trap, and the five universal principles that matter more than the method.
Bollinger Bands
A moving average wrapped in a standard-deviation envelope. Squeeze, band-walk, the real meaning of ±2σ — and the worst misuse: 'fade the touch'.