The Average True Range (ATR) is a technical indicator that measures market volatility. Developed by J. Welles Wilder Jr., it calculates the average of true ranges over a specified period (typically 14 periods).

How ATR Is Calculated

The True Range 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 then the moving average of these true ranges.

Using ATR for Stop Losses

A common strategy is to set stop losses at 1.5x to 3x ATR below entry price for long positions:

  • Entry: 1.0850
  • ATR(14): 80 pips
  • Stop Loss: 1.0850 - (80 × 2) = 1.0690

Key Points

  • Higher ATR = Higher volatility
  • Lower ATR = Lower volatility (potential breakout setup)
  • ATR does not indicate price direction
  • Useful for position sizing and risk management