Average True Range for Volatility Measurement and Risk Management

Summary

Average True Range (ATR) measures price volatility by averaging true range over a chosen lookback period. True range accounts for the current bar’s high-to-low distance and gaps relative to the previous close, using the largest of those distances. The document describes a commonly used 14-period setting and recommends adapting the lookback to the market and strategy.

ATR can help set volatility-scaled stop or profit levels and adjust risk exposure. The text also suggests that rising ATR may accompany a stronger trend and falling ATR may signal weakening, while high or low readings can inform whether conditions suit a trade. These interpretations are not entry signals on their own, and the article supplies no tested rules or performance evidence. ATR should be interpreted in context and combined with other analysis; its absolute values vary across assets and markets.

Key ideas

• ATR averages true ranges to describe the scale of price movement.
• True range accounts for both the current high-low span and gaps from the prior close.
• The lookback period should reflect the market and trading approach.
• ATR can support volatility-adjusted stops and risk sizing.
• Changes in ATR may describe changing volatility, but the document gives no tested standalone trading rules.

Tags

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