ATR (Average True Range) Explained
ATR (Average True Range) measures how much an instrument typically moves per period. It is the standard tool for setting stops and sizing to current volatility.
What ATR measures
ATR averages the 'true range' — the largest of (high minus low), (high minus prior close), (prior close minus low) — over a lookback, classically 14. It captures volatility including gaps, giving a single number for the typical move per bar.
ATR has no direction; it only measures size of movement. A rising ATR means the market is getting more volatile (bigger swings), a falling ATR means it is calming down.
Stops and sizing
The main use is volatility-adjusted stops: placing a stop, say, 1.5× ATR from entry keeps it outside normal noise so you are stopped by a real move, not a random wiggle. In a volatile market the stop is wider; in a quiet one, tighter.
Because position size is derived from stop distance, an ATR-based stop automatically shrinks size when volatility is high — a clean, mechanical way to keep dollar risk constant across regimes.
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Play Chart Bound free → Try today's Call the Candle →Frequently asked questions
What does ATR measure?
Average True Range measures volatility — the typical size of an instrument's move per period, including gaps. It shows how much price moves, not which direction.
How do I use ATR for stops?
Place the stop a multiple of ATR (commonly 1.5 to 2x) away from entry so it sits outside normal noise. Wider ATR means a wider stop; tighter ATR means a tighter one.
Does a high ATR mean the price is going up?
No. ATR has no direction — it only measures the size of moves. A high ATR means large swings in either direction, a low ATR means quiet, small-range conditions.