Average true range Wikipedia

If there isn’t a gap, it behaves like ADR and uses the difference between high and low as its calculation. Gaps are important because they are a part of the price movement. You can’t see them in higher timeframes or candles when they happen in the lower ones but they are still there. That trailing stop adjusts as the asset climbs but widens with increased volatility. To learn how volatility fits into breakout strategies, study the TTM Squeeze Indicator—a popular tool for pre-move compression detection.

Once the ATR signals, the volatility in the market can be confirmed by identifying the overbought or oversold market conditions through the Bollinger Bands. The ATR indicator is a non-directional indicator, which means that it does not provide any insight into the currency pair’s market movement or potential price movement. This results in mixed signals, especially when the markets are highly volatile and when trends are about to end. The non-directional movement of the ATR only helps you understand how volatile a currency pair is and combine it with other indicators to take further trading decisions.

• Stop-losses are market orders that would exit a losing trade at a predetermined price.
• Back-adjustments are often employed when splicing together individual monthly futures contracts to form a continuous futures contract spanning a long period of time.
• The Average True Range indicator is a technical analysis tool that measures the variability, fickleness, and volatility of market price movements.
• Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems.

This article explores the Average True Range indicator, how it works, and various strategies to use it in your trading endeavors. We also highlight the benefits and limitations derived from the indicator. The first is that ATR is a subjective measure, meaning that it is open to interpretation. No single ATR value will tell you with any certainty that a trend is about to reverse or not. Instead, ATR readings should always be compared against earlier readings to get a feel of a trend’s strength or weakness. You find that the highest values for each day are from the (H – L) column, so you’d add up all of the results from the (H – L) column and multiply the result by 1/n, per the formula.

As a result, they could set their stop-loss orders higher, because they might well think that price changes are to be expected, and that the market could, potentially make a recovery. As a result, the first could register a more notable change in its ATR by rising by $100 than the second would by $5, despite the first asset going up by 10% and the second by 50%. Traders should be aware of this and not use ATR measurements in isolation when devising their average true range strategy. The ATR can help you determine a stop-loss level that accounts for an asset’s volatility, reducing the risk of being stopped out prematurely due to normal price fluctuations. Now, let’s close in on a step-by-step procedure for trading financial assets with the Average True Range indicator.

• Even though the average true range is important for risk management, it’s also helpful to confirm trends.
• Traders leveraging the ATR for market analysis and decision-making must recognize its inherent constraints to avoid misinterpretations and trading errors.
• They are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session.
• We also highlight the benefits and limitations derived from the indicator.
• An increasing ATR can indicate potential breakout trading opportunities, signaling substantial price movements.

Using the ATR to exit the market

This section examines two significant ways to apply ATR to your trading strategy. The average true range is an indicator of the price volatility of an asset. It is best used to determine how much an investment’s price has been moving in the period being evaluated rather than an indication of a trend.

Frequently Asked Questions About Trading the ATR Indicator

Imagine we’ve found a setup in a currency pair with an ADR of 100. The currency pair has moved 20 pips so far and it has 80 to go on average. It has enough potential to move and make the result of our trade clear instantly or at least soon.

True Range (TR) Calculation

If you notice on this chart, ADR is not affected by the gap higher in February. If you scroll back to the ATR chart above, ATR starts moving up on that gap higher, because ATR includes the gap in daily movement. Average Day Range (ADR) only looks at how much the price moves between the high and low on a given day. This is the Day Range or DR, which is when averaged to create ADR. ATR is useful for measuring the price movement of whatever time frame is being analyzed.

What is the difference between ATR and ADR indicators?

Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI, and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder’s indicators have stood the test of time and remain extremely popular. For privacy and data protection related complaints please contact us at Please read our PRIVACY POLICY STATEMENT for more information on handling of personal data. This information is provided for informative purposes only and should not be construed to be investment advice.

The ATR’s effectiveness is also influenced by the period setting chosen by the trader. Therefore, selecting an appropriate period is essential to balance sensitivity and accuracy. Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of stock average true range your personal circumstances.

Reading ATR values involves understanding the magnitude of price movements. A higher ATR value indicates higher volatility, meaning the asset experiences larger price swings. Conversely, a lower ATR value suggests lower volatility with smaller price movements. Traders use ATR to assess market conditions and make informed decisions about entry and exit points, as well as setting stop-loss orders.

The Best Volume Indicators for Informed and Profitable Forex Trading

It won’t tell you where the market’s going—but it’ll tell you how violently it’s getting there. Stay on top of upcoming market-moving events with our customisable economic calendar. Copyright © 2025 FactSet Research Systems Inc.Copyright © 2025, American Bankers Association. SEC fillings and other documents provided by Quartr.© 2025 TradingView, Inc. Can toggle the visibility of the ATR Line as well as the visibility of a price line showing the actual current value of the ATR Line. Can also select the ATR Line’s color, line thickness and visual type (Line is the default).

Average True Range

Price Range is simply the absolute difference between the highest and the lowest price reached during a particular time period (e.g. a trading day). While both measure volatility, ATR focuses on actual price movement (true range), whereas Standard Deviation examines how far prices deviate from their average. When paired with trend indicators like moving averages, ATR can help you evaluate the strength of a trend and decide whether to stay in a trade or exit. Even though the average true range is important for risk management, it’s also helpful to confirm trends.

As you can tell by looking at the image, the ATR does not exactly mirror the price. However, it does show when the price would have been the most volatile. Indeed, if we look at the chart, we can see that, when the asset was at its highest price, it had something of a mid-range amount of volatility.

Discover the difference between our account types and the range of benefits, including institution-grade execution. It’s very unlikely that it goes beyond that level except there is one of the most volatile news such as NFP. Whichevergives the larger amount, it picks that one so if there is a gap it’scalculated. Average True Range (ATR) is a volatility gauge, not a crystal ball.