Average True Range (ATR)
Average True Range (ATR) is a pure volatility gauge that measures the average size of recent candles, taking into account gaps, and is the standard input for volatility-adjusted stops and position sizing.
What it measures
ATR averages the "true range" of the last N candles, where true range is the largest of (a) high − low, (b) |high − previous close|, and (c) |low − previous close|. The extra two cases capture overnight gaps that a plain high − low ignores.
Parameters
| Name | Default | Range | Note |
|---|---|---|---|
| period | 14 | 7–30 | Wilder's original value. Lower periods track short-term volatility bursts; higher periods produce a steadier baseline for sizing. |
| smoothing | RMA | RMA, SMA, EMA | RMA (Wilder's smoothing) is the original and the industry default. SMA equal-weights; EMA reacts faster but is not what most references mean by "ATR". |
How it behaves
ATR rises when candles get bigger, falls when they compress, and has no directional bias — it says nothing about whether price is going up or down, only how much it is moving. Multiples of ATR (2×, 3×) are the canonical way to place stops that adapt to instrument and timeframe volatility instead of fixed pip or point values.
When it misleads
ATR is a lagging average, so it under-reports volatility at the exact moments it matters most — the first candles of a regime change. A stop placed at 2× ATR right before a news release or session open is dimensioned against the pre-shock calm, and gets hit by the shock. Widen or step aside around known events; do not rely on ATR to have already absorbed them.
Backtest result
Sourced backtest in preparation — we're running the rule on our own historical candles before publishing numbers we can stand behind.
FAQ
- What is a good ATR multiple for stops?
- Most systematic templates use 1.5× to 3× ATR from entry. 2× is a common starting point; below 1× is usually too tight to survive normal noise, above 3× starts to eat into reward-to-risk.
- Can ATR predict direction?
- No. ATR is a magnitude indicator only. Combine it with a trend or structure signal to get direction; use ATR to size the trade around that signal.
- How is ATR used for position sizing?
- Given a fixed dollar risk R and a stop of k × ATR, position size = R / (k × ATR × contract value). This is the mechanic that keeps risk per trade consistent across volatile and quiet instruments.
Build a strategy with ATR
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