ATR - Average True Range
Type: Volatility
ATR measures how much an asset typically moves over a given period. It tells you about volatility magnitude, not direction. It's one of the most practical indicators for position sizing and stop-loss placement.
How it Works
Created by J. Welles Wilder, ATR calculates the 'true range' of each period — the largest of: high minus low, high minus previous close, or low minus previous close (absolute). It then averages these values over a set period (default: 14).
The result is a single value in price terms — e.g. an ATR of 50 on a stock means it's been moving an average of 50 points per candle. The higher the ATR, the more volatile the instrument.
How to Read It
ATR doesn't have overbought/oversold levels or buy/sell signals. You read it by comparing its current value to its historical range.
Rising ATR means volatility is expanding — breakouts during high-ATR periods tend to be more significant. Falling ATR means volatility is contracting — consolidation phases often show low ATR.
Key Signals
• Stop-loss placement: Set stops at 1.5x–2x ATR from entry to avoid being stopped out by normal market noise.
• Rising ATR: Increasing volatility — often accompanies trend acceleration or news events.
• Falling ATR: Decreasing volatility — consolidation phase, potential breakout forming (like Bollinger Band squeeze).
• Position sizing: Larger ATR = larger price swings = smaller position size to control risk per trade.
Limitations
• ATR tells you nothing about direction — it's a pure volatility measure.
• It's a lagging indicator — it reflects recent volatility, not future volatility.
• Comparing ATR values across different instruments is meaningless without normalising for price level.
Trader's Tip: Use ATR for your stop-loss. A fixed 50-point stop is arbitrary. A stop set at 1.5x ATR is calibrated to the actual volatility of that instrument at that time. It's one of the most underrated risk management tools available.