ATR (average true range)

What ATR means

ATR stands for average true range. It is a volatility indicator created by J. Welles Wilder Jr. and published in the late 1970s. It answers one question: how far does this instrument typically move in one period? The period can be a minute, an hour, a day or a week, depending on the chart. ATR is shown as a single line in a separate pane below the price chart, and its value is expressed in the instrument's own price units, such as pips for a currency pair or dollars for a share.

Two points are worth stressing. First, ATR measures the size of price swings and says nothing about direction. A rising ATR can accompany a rally or a sell-off. Second, the word "true" matters. A plain high-minus-low range ignores gaps between sessions, but the true range includes them. That makes ATR more useful for markets that gap, such as shares after earnings or indices at the open.

Traders use ATR mainly for risk and sizing decisions, such as how wide a stop-loss should be, how large a position to open, and whether current conditions are unusually quiet or active.

How it works

The calculation has two steps.

1. For each period, compute the true range, which is the largest of three values. These are the current high minus the current low, the absolute difference between the current high and the previous close, and the absolute difference between the current low and the previous close.
2. Smooth the true range values over a lookback window. The standard setting is 14 periods. Wilder used his own smoothing method, which behaves like an exponential average. The first ATR is the simple average of the first 14 true ranges. After that, each new ATR equals the previous ATR multiplied by 13, plus the current true range, all divided by 14.

Because the figure is an average, it reacts gradually. A single wild candle nudges ATR up, and several calm candles let it drift back down. Shorter settings react faster and are noisier. Longer settings are smoother and lag more.

Some traders convert ATR to a percentage of price, so volatility can be compared between assets with different price levels.

A worked example

These numbers are illustrative. A trader looks at a daily chart of EUR/USD. The previous close was 1.0800. Today the high is 1.0880 and the low is 1.0790.

• High minus low = 1.0880 − 1.0790 = 0.0090, which is 90 pips.
• High minus previous close = 1.0880 − 1.0800 = 0.0080, or 80 pips.
• Low minus previous close = 1.0790 − 1.0800 = −0.0010, absolute value 10 pips.
• True range is the largest, so 90 pips.

Suppose the previous ATR(14) was 70 pips. The new value is (70 × 13 + 90) ÷ 14 = (910 + 90) ÷ 14 = 71.4 pips.

Now a sizing idea. If the trader chooses a stop distance of 1.5 times ATR, that is 1.5 × 71.4 = about 107 pips. To risk 100 USD on a 107-pip stop with a pip value of 10 USD per standard lot, position size is 100 ÷ (107 × 10) = 0.093 lot, roughly 0.09 lot after rounding down.

Why it matters

ATR turns the vague idea of choppy or calm into a number. That has three practical uses. It helps set stop-loss distances that adapt to current conditions rather than a fixed pip count. It supports position sizing, since a wider stop usually needs a smaller position to keep risk per trade constant. And it can show regime shifts, such as volatility compressing before a move or expanding during news.

Instruments differ greatly. A major currency pair might have a daily ATR of a few dozen pips, while a volatile crypto CFD or a small-cap share might move several percent a day. Leverage multiplies the effect of the same ATR on your account, and wider spreads in volatile moments can add costs.

How to use it in practice

• Start with the standard 14-period setting, then test others on the same timeframe you trade.
• Read ATR relative to its own recent history rather than as an absolute number.
• If you use an ATR-based stop, choose a multiple, often between 1 and 3, and keep it consistent.
• Convert the stop distance into position size using your account risk limit.
• Compare ATR across timeframes. A daily ATR will be much larger than a 15-minute ATR.
• Remember to check the spread against ATR. If the spread is a large share of the average range, trading costs are heavy.
• Review ATR before news events, since the indicator lags and will not anticipate them.

Common mistakes and misconceptions

• Reading a high ATR as a bullish or bearish signal. It only shows magnitude.
• Using the same multiple for all instruments and conditions without testing.
• Forgetting that ATR lags. It can understate risk right after a volatility spike begins.
• Mixing units, for example comparing a pip-based ATR with a dollar-based one.
• Believing an ATR stop prevents loss. Price can gap through it, and fills may be worse than planned.
• Treating a low ATR as safe. Quiet periods can end abruptly.

Risks and limitations

ATR is descriptive, not predictive, and it is not a trading signal. It depends on the lookback you choose, and it cannot capture sudden events such as central bank surprises or weekend gaps beyond what has happened before. Stops placed using ATR may still be triggered by random noise, or may be skipped over in fast markets. On leveraged products, even a stop that is statistically reasonable can lead to a loss that is large relative to your deposit.

How Brokeli looks at it

ATR is a tool for the trader, not a broker feature, but platform quality matters. In our research we look at whether a broker's platform includes standard indicators like ATR, how charts handle price types and gaps, and what spreads and commissions apply when volatility is high, using published fee schedules and our research snapshots.