ATRAverage True Range

What is ATR?

ATR was introduced by J. Welles Wilder Jr. in 1978 alongside RSI. It measures the average daily (or per-period) range, accounting for gaps. ATR is direction-agnostic — it does not predict whether price goes up or down, only how wide the typical range is.

Where most indicators try to predict direction, ATR predicts magnitude. That makes it uniquely useful for the two most important practical decisions in trading: where to place a stop loss, and how big a position to take. Both should scale with realized volatility, not with arbitrary pip counts.

Category

Volatility measure

Default settings

14 candles

Signal range

Pips/dollars per period

Introduced by

J. Welles Wilder Jr., 1978

How ATR works

True Range for a single bar is the largest of three values:

TR = max(High - Low, |High - PriorClose|, |Low - PriorClose|)

The first term is the bar's own range. The second and third terms catch gaps — if price gaps up overnight and opens above the prior close, the gap is included in TR. ATR is then the smoothed average of TR over the lookback (14 by default, using Wilder's smoothing).

The resulting value is in the same units as price. ATR(14) of 80 pips on EUR/USD means the average 14-bar range is 80 pips. On a stock at $100, ATR(14) of $2 means the average bar swings $2.

How to use ATR

Two essential applications.

1. Stop placement: Set initial stops at a multiple of ATR away from entry. A 1.5x or 2x ATR stop is far enough that normal noise won't take it out, but tight enough that genuine reversals do. This automatically adapts to current volatility — a 50-pip stop on a quiet EUR/USD day is the same risk as a 100-pip stop during high-volatility ECB week.

2. Position sizing: Combine ATR with your fixed-percent risk rule. Size each trade so a 1.5x ATR stop equals 1% of account. This means you size smaller in volatile conditions, larger in calm ones — automatically.

Avoid using ATR as a directional signal. It is not designed for entries. Rising ATR tells you volatility is increasing; falling ATR tells you it is contracting. Neither tells you which way price will move.

Want more practical context? Look up unfamiliar terms in the forex glossary, or see how indicators stack on real charts in the trading blog.

ATR FAQ