What Is the ATR Indicator? A Beginners Guide

It does this for a set number of periods—14 is the standard—and then smooths the results into a moving average. Both of the above equity charts are based on swing trading, where the holding period is a few days. Buy when the close is below the ten-day moving average of the closing price deducted the ten-day Average True Range multiplied with 1.5. If you are trading a portfolio of ten stocks, each of them might have different volatility. It doesn’t make sense to trade the same size in stocks that might be completely different in terms of volatility. As different assets may carry different values and, as a result, different levels of volatility, ATR values should not be compared across multiple markets.

The ATR measures the degree of price movement in a given period, irrespective of direction. It factors in the difference between the current high and low, as well as the previous close. This allows the ATR to reflect the true market range, including gaps. The indicator known as average true range (ATR) can be used to develop a complete trading atr technical indicator system or be used for entry or exit signals as part of a strategy. Professionals have used this volatility indicator for decades to improve their trading results.

ATR Indicator by the Numbers: Market Insights, Trends, ROI Data (2025–

This methodical approach strips emotion out of the equation and forces consistent risk management—a true cornerstone of long-term trading success. Here’s how the ATR-based formula automatically adjusts your exposure. Notice you buy far fewer shares of the volatile stock and many more of the quiet one, but your maximum potential loss on both trades is locked in at $250. Personally, I make it a habit to scan for assets where the 14-day ATR has dropped to a multi-month low.

How Average True Range (ATR) Can Improve Your Trading Performance?

ATR Channels (also known as ATR Bands) are dynamic volatility-based bands that can be plotted above and below the price using a multiple of the Average True Range (ATR). Just like the Bollinger Bands, they help to create a channel around the price, which in this particular case can be helpful in reflecting market volatility. FlatThresholdFraction – Fraction of average ATR setting the minimum volatility for signal generation. Bollinger Bands are well-known and can tell us a great deal about what is likely to happen in the future. Knowing a stock is likely to experience increased volatility after moving within a narrow range makes that stock worth putting on a trading watch list.

In addition, there are 2 extra buffers, the DI+, and DI- that also quantify the strength of price rises and price falls respectively. This Indicator uses setfiles to make the signals more accurate for each timeframe and currency pair. Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading!

How to trade

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• We explain what the Average True Range indicator is, how it works, how you can use it, and if it’s possible to make profitable strategies by using the ATR.
• The price decreased when the ATR line reached the point from which it could rise, which is simply indicative of an increase in volatility.
• Unlike other indicators that focus on price direction, the ATR solely measures the degree of price movement, making it an essential component of many traders’ risk management strategies.
• In a wild, choppy market (high ATR), your stop will be wider, which helps protect you from getting stopped out by erratic price swings.
• The ATR can also give a trader an indication of what size trade to use in the derivatives markets.

Also be on the lookout for periods of low volatility which could precede a period of high volatility. A good way to do this is to compare the ATR values with the price range of candlesticks or bar charts. If the ATR is significantly lower than recent price ranges, this could be an indication that a period of high volatility is about to begin. Wilder also believed that high ATR readings indicated market tops and low ATR readings indicated market bottoms.

How to calculate the True Range

This often happens right before a period of consolidation or sideways chop. This isn’t just theory; understanding volatility has a direct impact on your P&L. A market with a high ATR is like a boat in choppy seas—it creates bigger waves, which means more opportunity but also way more risk. If you set a tight stop-loss in that kind of environment, you’re practically guaranteed to get knocked out by normal market noise before your trade has a chance to work. Before you can really put the ATR to work, you have to get what it’s not. The ATR indicator is useful on its own and can be used to develop an Average True Range trading strategy.

It is possible to use the ATR approach to position sizing that accounts for an individual trader’s willingness to accept risk and the volatility of the underlying market. Traders can use shorter periods than 14 days to generate more trading signals, while longer periods have a higher probability of generating fewer trading signals. The majority of the time, prices decrease in markets with higher volatility, while markets exhibit an upward trend when volatility is at its lowest. The images below illustrate the potential of ATR to assist in the identification of market trends.

• This isn’t just theory; understanding volatility has a direct impact on your P&L.
• This authoritative, data-rich guide integrates practical insights and resources, supporting your mastery of the ATR Indicator and optimizing financial strategies through 2030.
• By sidestepping these common blunders, you can transform the ATR from a simple line on your chart into a genuinely nuanced tool for making smarter trading decisions.
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• Yet again, this period aligned with another drop in SUNTV’s stock price.
• However, if the ATR is unusually low, it may indicate that XYZ is undervalued and ripe for a breakout.

The average true range (ATR) is a technical indicator that tells you the volatility of a stock on average over a given period. It doesn’t convey the direction of the stock’s price, but just how much the price has moved. It helps traders avoid low-volatility environments (more volatility means better chances for profits), set stop losses, and avoid false breakouts. Swing traders can further use ATR to exit positions at key known/identified price-levels by adding or subtracting a multiple of ATR to recent swing highs or lows. This allows them to account for average price movement and exit near key reversal points. ATR’s measure of market volatility makes it an effective tool for determining dynamic exit points based on current market conditions.

For swing traders, ATR contraction can signal that the price is stuck in a consolidation phase, suggesting it is time to exit positions and avoid being caught in sideways movement. Conversely, once the contraction ends, swing traders can look for entry points when volatility starts to expand again. Alternatively, swing traders can use ATR contraction to identify range-bound markets, for trading the range by buying at support and selling at resistance until a breakout or breakdown occurs. The Buy and Sell ATR Indicator is a powerful trend-following tool for MT5, combining ATR-based trend detection with RSI confirmation.

In his book “New Concepts in Technical Trading Systems” J. Welles Wilder introduced the ATR, initially as a tool to measure the volatility of commodities as they are often more volatile than stocks. However, the ATR is now widely used by traders and analysts for various assets. The book published in 1978 featured other key trading indicators such as the Directional Movement Index (ADX) and the Accumulative Swing Index (ASI). The ATR is typically used by traders as a trailing stop-loss order or to exit a trade when the stock or other security reverses direction. While the ATR can be used alone, it is often used in conjunction with other technical indicators to confirm trading signals.