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ATR (Average True Range)

The ATR measures the real average excursion of bars over 14 periods, gaps and wicks included. It has no direction: it is the ruler used to size stops, targets and position size.

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The ATR, introduced by J. Welles Wilder in 1978, measures one thing only: how much the market actually moves, on average, from bar to bar. No direction, no signal — a ruler. It is the most underrated tool in the catalogue, and the one professionals use most, because it answers the two questions the account's survival depends on: how wide the stop must be, and how large the position can be.

In plain terms — Before crossing a river you want to know how rough the water is, not just which way it flows. The ATR is the wave gauge: it does not tell you where price will go, it tells you how hard you will be tossed around on the way.

How it is calculated

A bar's true range is the largest of three distances — so opening gaps cannot escape the measurement:

Distance Covers
high − low The normal bar
|high − previous close| Upside opening gap
|low − previous close| Downside opening gap

The ATR is Wilder's (slow exponential) average of the true range over 14 periods. The result is expressed in the instrument's points: an ATR of $120 on Bitcoin means a typical recent bar covered about $120 of excursion.

How to read the chart — Top: the same instrument in two regimes — short, orderly swings, then wide and nervous ones. Bottom: the ATR rises when ranges widen, indifferent to direction. Interactive — the highlighted points compare the quiet regime, the volatility expansion and a stop sized in ATR units.

INDICATOR · VOLATILITY ATR — the average true range Wilder moving average of the True Range over 14 periods CYCLEPEDIA DIAGRAM — EMICICLO PRICE — SAME INSTRUMENT, TWO REGIMES Price 95 98 101 ATR (14) 1.6 expansion ATR LOW → HIGH 0.7 → 2.2 SWING BETWEEN REGIMES × 3.3 ATR has no direction: it is the ruler for stops and position size
The ATR rises during the decline: it measures the size of the move, not its direction.
Select the highlighted points to explore the detail

Reading it in practice

  1. Stops that breathe — a fixed-point stop ignores the market: too tight when volatility rises (stopped out by noise), too wide when it falls. A stop at 1.5–2 × ATR from entry adapts by itself: wide in rough markets, tight in quiet ones. It is the basis of the Chandelier exit and many trailing stops.
  2. Position sizing — with a fixed risk per trade (say 1% of capital), size follows from the ATR: size = risk ÷ (k × ATR). At double the volatility you trade half the size: risk in money stays constant. See position sizing and risk per trade.
  3. Regime filter — ATR in expansion = nervous market: wider stops, smaller size, more ambitious targets. ATR in compression = the quiet that often precedes expansion (the same logic as the Bollinger Bands squeeze).

Limits and traps

Warning — The ATR describes recent volatility: it does not foresee the shock that changes it. After heavy news the ATR updates a few bars late — a stop sized on yesterday's world can be inadequate for today's.

  • It is expressed in points: it cannot be compared across instruments with different prices (use ATR ÷ price, as a percentage, for comparisons).
  • It does not distinguish "good" volatility (a running trend) from "bad" (panic): for direction you need price, or the ADX.
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