Average True Range (ATR) is a volatility indicator that measures market fluctuations to help traders assess potential price movement and set stop-loss levels
What Is the Average True Range (ATR) Indicator?
The Average True Range (ATR) is a volatility indicator. It tells you how much an instrument is moving, on average, over a set lookback (14 periods is the default). J. Welles Wilder Jr. introduced it back in 1978, and it’s still a go-to because it’s simple and useful.
The key point: ATR measures movement size, not direction. A rising ATR doesn’t mean bullish, and a falling ATR doesn’t mean bearish.
How Does ATR Work in Trading?
ATR starts with True Range (TR) each period. TR is the biggest number from these three:
High − Low
|High − Previous Close|
|Low − Previous Close|
That’s why it works better than a basic daily range. It picks up things like overnight gaps, hard opens, and limit-style moves that a simple high/low range can miss. The math is covered well in this ATR overview.
You can run ATR on anything—5-minute charts, 4H, daily, weekly. The read is always the same idea: “How far is this thing swinging per bar?”
Why Is ATR Useful vs. a Simple Range?
ATR’s edge is that it respects discontinuities. Stocks gap on earnings, futures jump on data, FX can lurch on central bank headlines—ATR bakes that into the volatility read instead of pretending the session started clean.
"ATR indicates volatility magnitude, not direction" and it helps traders compare volatility across different assets.
In practice, that’s why traders use it for stops, sizing, and targets. When volatility expands, ATR expands, so your risk framework can expand with it instead of getting chopped up by normal noise.
How to Use ATR for Position Sizing, Stops, and Breakouts
How to Size Positions with ATR
ATR is useful because it makes sizing and risk portable across markets. Instead of “I always trade 2 contracts,” you’re saying “I always risk $X based on current movement.” This is the core idea behind ATR-based position sizing.
A common framework looks like this: Position Size = (Risk Amount ÷ (ATR × Multiplier)) ÷ Contract/Lot Size. If ATR expands, your size comes down automatically.
How Do You Calculate ATR Position Size?
Pull the current ATR on the timeframe you trade
Set your risk amount (a lot of traders use ~1% per idea)
Pick a stop multiplier (1.5 is a common middle ground)
Risk amount ÷ (ATR × multiplier) gives you the unit sizing in “ATR terms”
Convert to the actual instrument specs (shares, contracts, FX lot size)
ATR Position Sizing Example (Forex)
Say you’ve got a $10,000 account and you risk 1% ($100) on EUR/USD. If ATR is 90 pips and you use a 1.5× ATR stop (135 pips), you land around 0.07 lots. The point isn’t the exact number—it’s that your risk stays stable even when EUR/USD wakes up or goes to sleep.
How to Set a Stop Loss Using ATR
ATR-based stops are basically “give the trade room equal to normal noise.”
1× ATR: tight. Works when timing is sharp, but you’ll get tagged more.
1.5× ATR: a solid default for many swing setups.
2× ATR: wider. Fewer random stop-outs, but your position size needs to shrink to keep risk constant.
How to Use ATR to Filter Breakouts
ATR helps filter breakouts. If price is barely pushing beyond a level and the move is smaller than what the market does on an average bar, it’s often noise. Moves that travel ~1.5× to 2× ATR with expanding ATR tend to be more “real,” especially when they clear clean structure.
What Indicators Work Well with ATR?
ATR plays well with trend filters (like a 20/50 EMA), clean support/resistance, and momentum tools. Let those handle direction and timing, then let ATR handle the risk wrapper.
How to Trail a Stop with ATR
For trends, a common approach is trailing a stop around 2× ATR behind price. It gives the trade breathing room while still tightening as volatility contracts. Just don’t treat any fixed ATR multiple like a magic number—different tickers behave differently, like Tesla versus Coca-Cola, or WTI crude versus gold.
Keeping a trading journal helps here. You’ll quickly see whether your ATR multiple is too tight for that instrument, or so wide that you’re donating open profit back to the market.
How to Read ATR Values: What Volatility Tells You
ATR is the average size of the candles (with gaps included). When ATR is high, ranges are wide and risk expands. When ATR is low, price is quieter and tends to respect tighter structure.
Rising vs. Falling ATR: What It Signals
Rising ATR means volatility is picking up. That often shows up around breakouts, trend acceleration, or panic/liquidation candles.
Falling ATR means volatility is drying up. You’ll usually see more compression, chop, and range trade behavior.
High ATR is a warning label: bigger candles, bigger slippage risk, wider stops, smaller size.
Low ATR usually means tighter rotations and cleaner levels, but it can also be the calm before the storm.
Does ATR Measure Trend Strength?
ATR is about intensity, not trend quality. You can have a nasty downtrend with huge ATR, or a steady uptrend with small ATR. ATR won’t tell you who’s winning—just how hard the fight is.
ATR Examples: Comparing Volatility Across Stocks
As a quick reality check, growth names tend to carry bigger ATR as a percent of price than defensive names. In March 2025, Nvidia’s ATR ran around 6.2% of its share price, while Johnson & Johnson sat closer to 1.7%. Same indicator, totally different “normal.”
How to Adjust Position Size Using ATR
Good traders size off volatility. When ATR is low, you can usually run a bit more size because the expected swing against you is smaller. When ATR expands, you cut size so your $ risk doesn’t blow out just because the market got louder.
ATR Limitations: What It Can’t Tell You (and Best Practices)
ATR has one big limitation: it doesn’t tell you direction. On its own, it’s not an entry or exit signal—it’s a volatility gauge.
Other common issues:
It lags: it reacts after volatility changes, not before.
Quiet markets can fake you out: very low ATR can make risk look smaller than it really is, especially ahead of catalysts.
Lookback matters: a 5 ATR and a 50 ATR can paint totally different pictures.
No fundamentals: CPI, FOMC, earnings, geopolitics—ATR doesn’t “know” any of that is coming.
Needs history: brand-new listings or thin instruments can give messy early readings.
Best use is pairing ATR with directional/context tools—moving averages, momentum oscillators, and obvious support/resistance—then letting ATR dictate sizing and stop distance.
If you’re building rules around it, backtest it across different regimes (trend, chop, high vol, low vol). This backtesting guide is a solid reference point.
How Is ATR Calculated? True Range and the ATR Formula
What Is True Range (TR)?
True Range is the raw input. It’s basically “the widest realistic move” for that bar once you account for where the last bar closed. That previous close reference is what makes TR more honest during gaps and fast repricing.
True Range Formula: The 3 TR Calculations
TR is the maximum of:
Current high minus current low (standard daily range)
Absolute value of current high minus previous close
Absolute value of current low minus previous close
ATR Formula: Wilder’s Smoothing Method
Wilder’s original method starts by averaging the first 14 TR values. After that, it uses a smoothing step (similar feel to an EMA). Full breakdown here: ATR calculation.
ATR = ((Previous ATR × (n-1)) + Current TR) / n
With n usually set to 14. The smoothing matters because you don’t want one freak candle to completely distort your stop distance for the next week.
Example ATR Calculation Table
Period | High | Low | Close | Prev Close | TR Calculation | TR Value |
|---|---|---|---|---|---|---|
1 | 152.50 | 150.20 | 151.80 | 150.00 | Max(2.30, 2.50, 1.20) | 2.50 |
2 | 153.10 | 151.50 | 152.40 | 151.80 | Max(1.60, 1.30, 0.30) | 1.60 |
3 | 154.80 | 152.10 | 153.70 | 152.40 | Max(2.70, 2.40, 0.30) | 2.70 |
4 | 153.40 | 151.90 | 152.60 | 153.70 | Max(1.50, 0.30, 1.80) | 1.80 |
What ATR Period Should You Use?
Fourteen periods is the standard because it’s a decent balance: reactive enough to notice regime shifts, but not so twitchy that every random candle changes your whole plan.
If you’re trading faster (scalps, news fades, tight mean reversion), a 2–10 ATR reacts quicker. If you’re more position/swing focused, 20–50 smooths out the chop so you’re not resizing or moving stops every other day.
ATR by Timeframe: Why It Changes
ATR is timeframe-specific. A 14 ATR on a 4-hour chart is a completely different animal than a 14 ATR on daily or weekly. So the question isn’t “what’s the ATR?”—it’s “what’s the ATR on the timeframe I’m actually trading?”
How to Use ATR in Forex, Stocks, and Commodities
ATR works across asset classes, but the way you interpret it changes because market structure changes.
How to Use ATR in Forex Trading
In FX, ATR is naturally pip-based, which makes it easy to compare pairs. Majors like EUR/USD usually run tighter ATR than something like USD/TRY. Also, while FX trades 24 hours, it still reprices hard around session handoffs and news, and TR captures those jumps cleanly.
Day traders often use 5-minute or 15-minute ATR for intraday stops and targets. Swing traders lean on daily ATR to set realistic expectations for how far a pair can travel over a few days.
How to Use ATR in Stock Trading
Stocks are heavily event-driven. Earnings, guidance, FDA decisions, and index rebalances can blow ATR out for a few sessions. That’s why ATR is great for adapting risk, but it’s not a promise of what happens next week.
High-beta growth stocks tend to carry larger ATR than dividend blue chips. Tech usually runs hotter than utilities, so “2× ATR” on Nvidia is a different ride than “2× ATR” on Procter & Gamble.
How to Use ATR in Commodity Trading
Commodities add seasonality and headline risk. Corn and soybeans can shift with planting and harvest cycles. Crude oil reacts to OPEC headlines and geopolitics. Metals like gold and copper can whip around on USD strength and rate expectations.
Also, make sure you’re converting ATR into real $ terms correctly. One ATR point in ES futures isn’t the same as one ATR point in CL or GC, and contract specs matter.
How Do You Turn ATR-Based Risk Rules Into Consistent Execution?
ATR becomes most useful when you treat it as a repeatable risk “wrapper” and then review whether your wrapper actually matches how the instrument trades. Because ATR changes by market and timeframe, tracking your chosen ATR period, stop multiple, position size, and outcome (including slippage and partial exits) helps you see whether you’re getting stopped by normal noise or giving trades unnecessary room. Over a sample of trades, you can compare results across regimes—high ATR vs. low ATR—so adjustments are evidence-based rather than reactive. A trading journal also makes it easier to spot process errors (ignoring your sizing formula, moving stops inconsistently, or taking breakouts that don’t meet your ATR filter) versus strategy issues. If you want a structured way to log these inputs and review PnL, expectancy, and volatility-adjusted metrics, using Rizetrade trading journal analytics and performance tracking dashboard can help keep ATR decisions tied to measurable outcomes.