Average True Range: Calculation and Volatility-Based Trading Uses

Summary

Average True Range (ATR) measures the size of price movement, not its direction. The document explains True Range as the largest of the current high–low range and the distances from the prior close to the current high or low. ATR is then calculated by averaging True Range over a chosen lookback period; the article mentions several possible period lengths and gives a Python example using a rolling mean.

Suggested applications include adapting stop and target distances to volatility, adjusting position size, and using ATR alongside other indicators. Rising or falling ATR is presented as a possible clue to changing activity or trend strength, while unusually high or low readings may accompany transitions in market conditions. These interpretations are not directional forecasts, and the article notes that use varies by market and trader. It supplies no backtest or evidence that the example rules improve results.

Key ideas

• ATR summarizes recent price-range volatility and does not indicate whether prices are rising or falling.\nTrue Range compares the current high–low range with gaps from the previous close.\nATR averages True Range across a selected lookback period.\nTraders can use ATR to scale stops, targets, or position size to recent volatility.\nATR-based readings are contextual clues and should not be treated as standalone signals.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.