The Average True Range (ATR) is a technical indicator that measures market volatility by calculating the average range of price movement over a set period. It does not tell you direction; it tells you how much a market typically moves. Most traders use a 14-period ATR as the default setting.

How ATR Is Calculated

ATR looks at three values for each period and picks the largest:

  • Current high minus current low
  • Current high minus previous close (absolute value)
  • Current low minus previous close (absolute value)

The true ranges are smoothed over the selected lookback. TradingView's ATR documentation specifies Wilder-style RMA by default, with other smoothing options. A daily ATR of $2.50 summarises recent gap-adjusted ranges; it is not a forecast of tomorrow's movement or its closing return.

Using ATR for Stop Loss Placement

One of the most practical uses of ATR is setting your stop loss. Instead of picking an arbitrary dollar amount, you base your stop on what the market actually does.

A common approach: place your stop 1.5x to 2x ATR away from your entry. If the ATR is $1.00, your stop goes $1.50 to $2.00 away. That multiplier is a rule to test, not protection against normal fluctuations or a guarantee of execution at the stop price.

Compare stop distance with both recent volatility and the price level that would invalidate the setup. A tight distance can be inappropriate, but widening it without reducing size increases planned loss.

ATR for Position Sizing

ATR also helps with position sizing. If you risk $100 per trade and the ATR-based stop is $2.00, you trade 50 shares. If the ATR-based stop is $5.00, you trade 20 shares. This keeps the planned price-to-stop loss at $100 before fees and execution differences. For futures, include the contract's dollar value per point and round down to whole contracts.

If ATR contracts, do not let the formula increase exposure without a separate size cap. Quiet recent prices do not rule out a gap. FINRA explains why stock stop orders can fill beyond their trigger price.

Reading ATR on Your Charts

ATR appears as a single line below your price chart. Rising ATR means volatility is increasing. Falling ATR means the market is quieting down. A low reading describes recent quiet trading. It does not establish when a breakout will occur or which direction it will take.

Key Takeaways

  • ATR measures how much a market moves on average, not which direction
  • Test any ATR stop multiplier against the instrument and entry rules
  • ATR sizing controls planned stop exposure; actual losses can differ
  • Low ATR does not predict an imminent breakout
  • Record the lookback, chart interval and smoothing method when comparing readings

Frequently Asked Questions

What is a good ATR value? There is no universally "good" ATR. The number depends on the instrument and timeframe. What matters is whether ATR is high or low relative to its own recent history for that specific market.

Does ATR work on all timeframes? Yes. ATR works on 1-minute charts, daily charts, and everything in between. Just remember that ATR on a 5-minute chart measures average 5-minute ranges, while daily ATR measures average daily ranges.

Can ATR predict market direction? No. ATR only measures the magnitude of price movement, not the direction. You need other tools like moving averages or RSI for directional analysis.

Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.