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:

1. Current High - Current Low

2. Absolute value of (Current High - Previous Close)

3. 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:

1. Stop-Loss Placement: Use ATR to place stops beyond normal market noise. For example, a stop-loss 1.5x ATR below a support level.

2. Position Sizing: Traders use ATR to determine the amount of capital to risk—smaller positions during high volatility, larger in low.

3. Breakout Confirmation: An increasing ATR during a price breakout may confirm the move is strong and sustainable.

4. 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.