Average True Range (ATR)
Overview
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.
Key Concepts
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.
Entry Signals
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.
Exit Signals
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.
Best Timeframes
All timeframes — ATR adapts to any period
Pro Tips
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.
More Topics in This Category
Parabolic SAR
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.
Stochastic RSI
The Stochastic RSI applies the stochastic oscillator formula to RSI values rather than raw price data, creating a more sensitive momentum indicator that oscillates between zero and one. By measuring where the current RSI sits relative to its own range over a lookback period, the Stochastic RSI generates faster overbought and oversold signals than either the stochastic or RSI alone, making it particularly useful for timing entries within established trends.
Keltner Channels
Keltner Channels are volatility-based envelopes plotted above and below an exponential moving average using the Average True Range. Unlike Bollinger Bands, which use standard deviation, Keltner Channels produce smoother bands that are less reactive to individual price spikes. This makes them effective for identifying trend direction, overbought/oversold conditions, and volatility squeeze setups when combined with Bollinger Bands.
Average Directional Index (ADX)
The Average Directional Index quantifies trend strength on a scale from 0 to 100, regardless of direction. Developed by J. Welles Wilder, ADX is derived from two directional movement indicators (+DI and -DI) that measure bullish and bearish pressure respectively. A rising ADX above 25 signals a strengthening trend, while ADX below 20 indicates a ranging or trendless market — making it an invaluable filter for choosing between trend and range strategies.