What Is Average True Range (ATR)?

7 min read

Average True Range, or ATR, measures the typical size of an instrument's price movement over a chosen period, without indicating direction at all.

Because it says nothing about which way price is likely to go, ATR is used differently from most other indicators on this list - less for generating trade signals and more for shaping how a trade is sized and managed.

What it measures

ATR calculates the average of the 'true range' - the greatest of the current high-low range, the distance from the prior close to the current high, or the distance from the prior close to the current low - smoothed over a chosen number of periods.

Using the true range rather than just the current bar's high-low range matters because it also captures gaps between sessions, which a simple high-low measure would otherwise miss entirely.

• True range: The largest of three measures, including gaps from the prior close.
• Smoothing period: ATR averages true range over a chosen number of bars, commonly 14.
• No direction: ATR reflects the size of movement only, not which way price is heading.

Why it's used for risk management

Because ATR reflects how much an instrument typically moves, many traders use it to size stop-losses relative to current volatility, rather than using a fixed number of points that might be too tight in volatile conditions or too wide in calm ones.

A stop set at a multiple of current ATR automatically adjusts as volatility changes, which is one reason volatility-based stops are often preferred over a static distance that never adapts to market conditions.

• ATR-based stops: Setting a stop-loss as a multiple of current ATR, e.g. 1.5x ATR.
• Fixed vs. adaptive: A fixed-point stop can be too tight or too loose as volatility changes; ATR adapts.
• Position sizing: Higher ATR can justify a smaller position size for the same dollar risk.

Comparing volatility across time or instruments

ATR is also used to compare how volatile an instrument is now versus its own recent history, or to compare typical volatility between two different instruments, which can inform position sizing decisions.

A rising ATR on its own isn't bullish or bearish - it simply signals that whatever move is underway is becoming larger, which is useful context when deciding how tightly or loosely to manage an existing position.

• Historical comparison: Comparing current ATR to its own past levels flags rising or falling volatility.
• Cross-instrument comparison: ATR can be compared across instruments to judge relative typical movement.
• Neutral reading: Rising ATR signals bigger moves, not a directional bias.