What is Average True Range?
Average True Range (ATR)
Forex Trading Glossary
Quick Answer: Average True Range measures the average price range over a set period, helping traders size positions and set volatility-based stops.
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.
Practical Example
If EUR/USD has a 14-day ATR of 80 pips, a trader might place a stop one ATR away and target two ATRs to keep positive risk/reward.
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).
Related Terms
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