Average True Range: Calculation, Volatility Reading, and Risk Uses

Summary

Average true range (ATR) estimates an asset’s typical price movement over a selected period, including gaps by using the previous close when calculating true range. True range is the largest of the current high-low range and the absolute distances from the current high and low to the previous close. ATR then smooths those values; the article gives the Wilder-style recursive formula and notes that 14 periods is a common setting, though the period can be adjusted.

Traders can use ATR to compare volatility over time, set volatility-sensitive stops and targets, size positions, or build a trailing stop that moves as price rises. A higher ATR indicates larger recent price movement, not bullish direction or a forecast. The article also notes key limits: ATR is based on historical prices, can be distorted by outliers, and does not describe trend direction or other market conditions. It recommends combining ATR with tools such as RSI, but supplies no backtest or evidence that a particular ATR rule improves trading results.

Key ideas

• True range is the largest of the current high-low range and the high or low distance from the previous close.
• ATR smooths true range over a chosen lookback, with 14 periods described as a common choice.
• ATR measures the scale of recent price movement but does not indicate whether price is trending up or down.
• Volatility-based stops, targets, position sizing, and trailing stops are among the uses described.
• Because ATR is historical and sensitive to unusual moves, it should be interpreted alongside other analysis.

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