A volatility indicator that measures the average range between high and low prices over a specified period.
Deep Dive
Average True Range (ATR) is a volatility indicator developed by J. Welles Wilder. It measures the average price range of an asset over a specified period (typically 14 periods), taking into account gaps between sessions.
ATR is not directional - it only measures volatility, not trend direction. A rising ATR indicates increasing volatility (larger price movements), while a falling ATR indicates decreasing volatility. This information is invaluable for position sizing and stop-loss placement.
The most practical use of ATR is setting stop losses. Instead of using arbitrary pip or point values, traders use ATR multiples (e.g., 1.5x ATR) to set stops that account for current volatility. This prevents getting stopped out by normal market noise in volatile conditions while keeping stops tight when volatility is low.
Why It Matters
ATR helps set appropriate stop-loss distances and position sizes based on current market volatility.
Related Terms
- Bollinger Bands — Bollinger Bands are a popular technical analysis indicator that consists of a middle simple moving average and two outer bands, typically set two standard devia
- Breakout — A price movement through a defined support or resistance level with increased volume, signaling potential trend continuation.
- Position Sizing — Determining the appropriate trade size based on account risk tolerance and stop loss distance.
- Stop Loss — Stop Loss is a trading concept. Once I entered a trade, my stop loss was immediately placed in the system.
- Volatility — The degree of variation in an asset's price over time. High volatility means large price swings, low volatility means smaller movements.