Average True Range (ATR)
📌 What is the Average True Range?
The Average True Range (ATR) is a technical analysis indicator that measures market volatility. Developed by J. Welles Wilder, it's widely used to assess how much an asset moves, on average, during a given time frame. Unlike many indicators, ATR does not indicate price direction—only the degree of price movement (volatility).
⚙️ How Does It Work?
ATR is calculated using the True Range (TR) of each period, which is the greatest of:
Current High - Current Low
Absolute value of (Current High - Previous Close)
Absolute value of (Current Low - Previous Close)
The ATR is then the moving average (usually 14 periods) of these True Ranges. The result is a single line that fluctuates with changes in volatility.
📖 How to Read the ATR
A high ATR means the asset is experiencing high volatility.
A low ATR indicates the asset is in a period of low volatility.
ATR values vary depending on the instrument’s price—it's not percentage-based, so it should be interpreted relative to the asset.
For example: If the ATR of a coin is 0.05, that means its average daily move is 5 cents.
🔧 Best Settings
The default setting for ATR is 14 periods, but this can be adjusted depending on the trader’s style:
Short-term traders might use a 5–10 period ATR
Swing traders or position traders usually stick to 14–21 period ATRs
Experimentation with settings based on your trading timeframe is key.
📊 How to Use It in a Strategy
Here are some popular ways ATR is used in trading:
Stop-Loss Placement: Use ATR to place stops beyond normal market noise. For example, a stop-loss 1.5x ATR below a support level.
Position Sizing: Traders use ATR to determine the amount of capital to risk—smaller positions during high volatility, larger in low.
Breakout Confirmation: An increasing ATR during a price breakout may confirm the move is strong and sustainable.
Trailing Stops: ATR can trail price action dynamically, adjusting with changing volatility.
⚠️ Common Mistakes
Using ATR for Directional Signals: ATR is not a momentum or trend indicator. It tells you how much price moves, not where it’s going.
Ignoring Market Context: A rising ATR could mean a new trend—or just chaos. Always combine with price action or trend indicators.
Using Same ATR Settings Across Assets: Different assets have different volatility. Calibrate accordingly.
🧠 Final Thoughts
The ATR is a powerful tool that helps traders stay objective about volatility, not emotions. While it doesn’t give buy or sell signals on its own, it enhances decision-making by adding context to risk and movement.
Pair it with price action, moving averages, or trend indicators for better accuracy—and always respect what volatility is telling you.
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