ATR Indicator Explained

The Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a set period. It does not indicate direction—only how much price typically moves. ATR is widely used for setting stop losses and position sizing based on current market volatility.

ATR is based on the True Range, which is the greatest of: (1) current high minus current low, (2) absolute value of current high minus previous close, (3) absolute value of current low minus previous close. The ATR is a moving average (typically 14-period) of the True Range. Higher ATR means more volatility; lower ATR means less.

ATR is not a directional indicator. Use it for

1. Stop loss placement: Place stops 1–2 ATR away from entry to avoid being stopped out by normal volatility.
2. Position sizing: Reduce size when ATR is high; increase when ATR is low (within your risk rules).
3. Breakout confirmation: A breakout with expanding ATR suggests a genuine move.
4. Volatility filters: Avoid trading when ATR is extremely low (squeeze) or extremely high (chaos).

The default ATR period is 14. Shorter periods (e.g. 7) react faster; longer periods (e.g. 21) smooth volatility. Match to your timeframe. Many traders use 14 on all timeframes.

Do not use ATR alone for entries. It only measures volatility, not direction. Avoid placing stops too tight (less than 1 ATR) in volatile markets. Do not ignore ATR when sizing—high volatility requires smaller positions.