ATR (Average True Range)

Quick Answer

Average True Range (ATR) is a technical-analysis indicator that measures market volatility by averaging an instrument’s true range over a selected number of periods. ATR considers both the current high-low range and gaps relative to the previous close. It measures the size of price movement, not whether prices are moving up or down.

How does ATR work?

ATR was developed by technical analyst J. Welles Wilder Jr. and introduced in his 1978 book New Concepts in Technical Trading Systems.

The calculation begins with True Range (TR).

For each period, True Range is the largest of these three values:

Current high − Current low

Absolute value of Current high − Previous close

Absolute value of Current low − Previous close

Using the previous closing price allows ATR to account for price gaps that a simple high-low range could miss.

The True Range values are then smoothed over a selected period. A 14-period ATR is commonly used as a default, although traders can use shorter or longer periods depending on the analysis. Fidelity notes that ATR can be calculated using intraday, daily, weekly or monthly data.

Using Wilder's smoothing method, a commonly presented calculation is:

ATR = (Previous ATR × (n − 1) + Current TR) ÷ n

where n is the number of periods.

Key features of ATR

Several characteristics are important when interpreting Average True Range:

• ATR measures volatility, not direction: A rising ATR means price ranges are becoming larger, but it does not indicate whether the market is bullish or bearish.

• Higher ATR indicates greater recent movement: Larger average ranges generally correspond to higher recent volatility.

• Lower ATR indicates smaller recent ranges: Falling ATR generally reflects quieter price behaviour.

• Price gaps are included: True Range considers the previous close, making ATR different from simply averaging each period's high-low range.

• The timeframe matters: A daily ATR and an hourly ATR measure volatility over different intervals and should not be interpreted as identical.

• ATR is expressed in price units: A raw ATR value is tied to the price scale of the instrument. ATR Percentage, or ATRP, can instead express ATR relative to price.

Simple ATR example

Suppose a market has:

Current high: $105
Current low: $100
Previous close: $102

Calculate the three True Range components:

$105 − $100 = $5

|$105 − $102| = $3

|$100 − $102| = $2

The largest value is:

True Range = $5

Now suppose the previous 14-period ATR was $4.00.

Using Wilder's smoothing formula:

ATR = (($4.00 × 13) + $5.00) ÷ 14

ATR = $57 ÷ 14

ATR ≈ $4.07

The new ATR is therefore approximately $4.07.

This means recent true ranges have averaged roughly $4.07 under this calculation. It does not mean the market is expected to rise or fall by $4.07 next.

This example is illustrative only and does not represent actual FxGrow prices, trading conditions or expected market movements.

Potential benefits and uses

ATR may help traders evaluate how actively an instrument has been moving.

It can be used to:

• compare current volatility with earlier periods;

• identify periods of expanding or contracting price ranges;

• provide a volatility input for technical-analysis systems;

• adjust certain risk-management calculations to recent market volatility;

• evaluate whether fixed price distances are large or small relative to recent movement.

Some traders incorporate multiples of ATR into stop-distance or entry-rule calculations. However, ATR itself does not determine an appropriate stop-loss level or position size for every trader.

Risks, limitations and common misconceptions

A common misconception is that a rising ATR is a bullish signal. It is not.

Because ATR ignores direction, a sharp price decline can increase ATR just as easily as a sharp rally. Fidelity similarly notes that expanding ATR can accompany either buying or selling pressure.

ATR also does not predict future volatility with certainty. It is calculated from historical price ranges and therefore describes recent market behaviour.

Another limitation is that raw ATR values are difficult to compare directly across instruments with very different prices. For example, an ATR of $5 has a very different significance for a $20 asset than for a $1,000 asset. ATR Percentage can help normalise this comparison by expressing ATR as a percentage of price.

Finally, ATR-based stop or trading rules do not eliminate losses, slippage, gaps or other trading risks.