What is Average True Range?

What is Average True Range?

Average True Range (ATR) is a volatility indicator created by J. Welles Wilder. It measures the average distance price travels over a specified number of periods, accounting for gaps. Traders use ATR to size positions, set stop losses, and determine whether momentum is expanding or contracting.

How ATR is Calculated

• True range: The greatest of current high minus low, abs(high − previous close), or abs(low − previous close).
• Smoothing: ATR is typically the 14-period moving average of true range values.
• Units: Expressed in pips for forex, making volatility comparable across pairs.

Using ATR

• Dynamic stops: Adjust stop distance based on current volatility instead of fixed pip counts.
• Regime shifts: Rising ATR warns of expanding volatility—a cue to reduce leverage.
• Breakout confirmation: Strong breakouts often coincide with ATR expansion.
• Pair selection: Choose instruments whose ATR fits your trading style (scalpers prefer low ATR).

Deep Dive

Most edges come from applying clear rules consistently. Expand your analysis beyond a single signal: add context from higher timeframes, recent volatility, session behavior, and catalysts. Define invalidation so a trade becomes obviously wrong fast, keeping losses small while letting winners compound.

Trader Checklist

• Higher‑timeframe bias aligns with the setup.
• Clear level or zone for entry with confluence.
• Pre‑defined stop beyond structure; 2–3R target.
• Session/liquidity supports follow‑through.
• No imminent high‑impact news unless planned.

Strategy Ideas

• Combine structure with momentum confirmation (break/close/acceptance).
• Use partials: scale out at first target; trail remainder.
• Journal results by session and pair to refine timing.

Risks and Limitations

• Thin liquidity widens spreads and distorts signals.
• False breaks around obvious levels—wait for acceptance.
• Overfitting indicators; keep the process simple and robust.

Example

Map bias on the daily chart, mark a zone, and wait on 1H for a close back above with rising participation. Enter on the retest; stop beyond the invalidation wick; target prior swing with room for extension. Record the outcome and context to iterate.