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ATR, developed by J. Welles Wilder, is a volatility indicator measuring the magnitude of market price movements. Unlike other indicators, ATR doesn't indicate price direction but quantifies market volatility. Higher ATR values indicate more volatile markets; lower ATR values indicate calmer markets.
TR (True Range) = Max[(H - L), |H - PC|, |L - PC|] Where: H = Current high L = Current low PC = Previous close ATR = N-period moving average of TR Standard period: N = 14 First ATR = Simple average of first 14 TRs Subsequent ATR = [(Previous ATR × 13) + Current TR] / 14
Standard ATR (14 periods): Most commonly used, suitable for most markets
Short-term ATR (7-10 periods): More sensitive, suitable for short-term and intraday trading
Long-term ATR (20-30 periods): Smoother, suitable for long-term trend analysis
ATR Percentage: ATR divided by price, for comparing assets at different price levels
ATR Channel: Price channel based on ATR, similar to Bollinger Bands
Rising ATR: Increasing volatility, possible trend acceleration or reversal
Falling ATR: Decreasing volatility, possible consolidation phase
ATR Breakout: Sudden sharp rise in ATR, usually accompanies significant price breakout
ATR Contraction: ATR declining to low levels, signals possible large move ahead (similar to Bollinger squeeze)
ATR Multiples: Using ATR multiples to set stop losses and targets
ATR is most commonly used for setting stop losses, such as placing stops 2 ATR below entry price, dynamically adjusting stop distance based on market volatility. ATR is also used for position sizing, reducing position size in high volatility and increasing in low volatility. Many trend-following systems use ATR to identify breakout signals and set trailing stops. ATR can also help select appropriate timeframes and strategy types.
Objectively measures market volatility, applicable to all markets and timeframes, helps set reasonable stops and targets, used for position sizing and risk control, identifies market state changes
Doesn't provide directional signals, lagging indicator cannot predict future volatility, may underestimate volatility at trend beginning, requires combination with other indicators
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