Average True Range measures market volatility by calculating the average range of price movement over a specified period, accounting for gaps. Developed by J. Welles Wilder, ATR does not indicate direction — it quantifies how much an asset typically moves, making it essential for position sizing, stop-loss placement, and volatility-based trade management. Rising ATR indicates increasing volatility; falling ATR signals contracting volatility.
True Range: the greatest of current high-low, abs(high-previous close), abs(low-previous close). ATR is typically calculated over 14 periods. Rising ATR = expanding volatility. Falling ATR = contracting volatility. ATR is non-directional — it measures magnitude, not direction. Used for position sizing: smaller positions when ATR is high, larger when ATR is low.
Enter breakout trades when ATR is at historically low levels (volatility contraction precedes expansion). Size positions inversely to ATR — if ATR doubles, halve your position size to maintain consistent risk. Use ATR-based entries: buy when price moves more than 1 ATR above a key level in one bar. Look for ATR expansion on breakout bars to confirm genuine momentum.
Place stops at 1.5-2x ATR from your entry point to accommodate normal market noise. Trail stops using a Chandelier Exit (highest high minus 3x ATR). Exit if ATR spikes to extreme levels, as this often occurs at climax moves. Take profits when price moves 2-3x ATR from entry in a single session.
All timeframes — ATR adapts to any period
ATR is the single most important tool for position sizing — traders who size positions based on ATR maintain consistent risk across different volatility environments. Use ATR percentile rank (where current ATR sits relative to its own history) to assess whether volatility is high or low in context. Combine ATR-based stops with structural stops (below swing lows) for optimal placement.
The Commodity Channel Index measures an asset's deviation from its statistical mean price, oscillating around a zero line with no fixed upper or lower bound. Originally designed for commodities by Donald Lambert, CCI is effective across all markets. Readings above +100 indicate strong bullish momentum (potential overbought), while readings below -100 signal strong bearish momentum (potential oversold).
The Vortex Indicator consists of two oscillating lines — VI+ (positive trend movement) and VI- (negative trend movement) — that capture the directional movement of price through the relationship between the current high and prior low, and the current low and prior high. Crossovers between these lines signal trend changes and provide entry and exit timing for trend-following strategies across any market.
The Parabolic Stop and Reverse (SAR) is a trend-following indicator that plots dots above or below price to define the current trend direction and provide trailing stop levels. Developed by J. Welles Wilder, the indicator accelerates toward price as the trend matures, eventually crossing price to signal a reversal. The parabolic curve of the dots gives the indicator its name.
Rate of Change is a pure momentum oscillator that measures the percentage change in price over a specified number of periods. It oscillates around a zero line, with positive values indicating upward momentum and negative values indicating downward momentum. ROC is useful for identifying momentum shifts, overbought/oversold conditions, and divergences that precede price reversals.