Trend · Indicator
ATR measures volatility by averaging the true range of each bar, giving a price-unit estimate of how far the market typically moves.
Overview
Average True Range measures volatility by averaging the true range over N periods. True range is the greatest of the current high minus the low, the absolute difference between the high and the previous close, and the absolute difference between the low and the previous close. A higher ATR means a more volatile market. Including the previous close is what makes it a 'true' range: it captures gaps that a simple high-minus-low would miss entirely.
ATR is directionless by design. It rises when a market moves a lot regardless of which way, so a sharp sell-off and a sharp rally of the same size produce the same reading. That makes it useless as a directional signal and extremely useful as a scaling tool, which is its main role: converting an arbitrary distance into a number of typical daily moves.
Because it is quoted in the instrument's own price units, ATR is not comparable across instruments. An ATR of 2 means something completely different on a 30-dollar stock than on a 3000-dollar index. Traders who need a comparable figure divide ATR by price to express it as a percentage.
How it is calculated
True range is computed for each bar as the largest of three distances, so it is always at least as large as the bar's own high-low range and larger when the bar gapped away from the previous close. The result is then smoothed using Wilder's method, a recursive average with a smoothing constant of 1/N.
The recursive form means ATR responds gradually to changes in volatility and never drops sharply after a single quiet bar. The first value is seeded from a simple average of the first N true ranges.
True range = max( high - low, abs(high - previous close), abs(low - previous close) ) First ATR = simple average of the first N true ranges ATR[i] = (ATR[i-1] * (N - 1) + True range[i]) / N
Inputs
How to read it
ATR is read as a level relative to its own history rather than against a fixed threshold. An ATR at the high end of its recent range says the market has been moving in unusually large increments, which typically coincides with news, a trend acceleration or a sell-off. An ATR at the low end says ranges have compressed, which is the condition squeeze indicators are built to detect.
Its main practical use is sizing distances. Expressing a stop, a target or a channel width as a multiple of ATR makes the same rule behave consistently across instruments and across volatility regimes, which is why ATR appears inside Supertrend, Keltner Channels and most volatility-adjusted position-sizing methods.
Direction of change matters more than the level. Rising ATR means ranges are expanding, which usually accompanies a directional move or a break from consolidation; falling ATR means the market is settling down, which often occurs during trends that grind steadily rather than lurching.
Signals to look for
A sharp rise in ATR from a compressed level indicates ranges have begun expanding, which commonly accompanies a break out of consolidation. It gives no indication of direction.
ATR falling to the low end of its recent range identifies a quiet market. Traders watch these periods because sustained low volatility is often followed by an expansion, though the timing is not predictable.
Placing a stop a fixed multiple of ATR from entry, or trailing it that distance behind price, is the most common application. It sets the distance according to how much the market actually moves rather than an arbitrary figure.
Limitations
Frequently asked questions
ATR measures volatility by averaging the true range of each bar, giving a price-unit estimate of how far the market typically moves.
ATR is read as a level relative to its own history rather than against a fixed threshold. An ATR at the high end of its recent range says the market has been moving in unusually large increments, which typically coincides with news, a trend acceleration or a sell-off. An ATR at the low end says ranges have compressed, which is the condition squeeze indicators are built to detect.
Volatility expansion: A sharp rise in ATR from a compressed level indicates ranges have begun expanding, which commonly accompanies a break out of consolidation. It gives no indication of direction.
ATR carries no directional information whatsoever. A rising ATR tells you the market is moving more, not which way, and cannot be used as a signal on its own.
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