Average True Range
Technical IndicatorsA volatility indicator that measures the average range of price bars over a specified period, accounting for gaps. ATR does not indicate direction but shows how much a pair typically moves, helping traders set appropriate stop-losses and position sizes.
What Is the Average True Range?
The Average True Range (ATR), created by J. Welles Wilder, measures Volatility by calculating the average of "true ranges" over a period (default 14). The true range for each bar is the greatest of: current high minus current low, absolute value of current high minus previous close, or absolute value of current low minus previous close. This captures gaps that a simple high-low range would miss.
Using ATR for Stop-Losses
ATR's most practical application is setting stop-loss distances. Instead of using a fixed pip amount (like 50 pips on every trade), multiply the current ATR by a factor, typically 1.5x to 3x. If EUR/USD's 14-period daily ATR is 75 pips, a 2x ATR stop is 150 pips. This adapts your stop to current market conditions: wider during volatile periods, tighter during calm ones. Your Position Sizing then adjusts so dollar risk stays constant. Use the Position Size Calculator to calculate the correct lot size after determining your ATR-based stop.
ATR for Profit Targets and Filtering
Set take-profit targets as a multiple of ATR as well. A 1:2 Risk-Reward Ratio with a 1.5x ATR stop means a 3x ATR profit target. ATR also works as a trade filter: if today's range has already exceeded the daily ATR, a breakout is less likely to extend further. Conversely, if a pair has barely moved relative to its ATR, there may be room for a significant move later in the session.
Related Terms
Volatility
The degree to which a currency pair's price fluctuates over a given period. High volatility means large price swings; low volatility means the price moves in a narrow range.
Bollinger Bands
A volatility indicator consisting of three lines: a middle simple moving average (typically 20-period) and upper and lower bands set at 2 standard deviations above and below it. The bands expand during high volatility and contract during low volatility.
Keltner Channel
A volatility-based envelope indicator that plots bands above and below an exponential moving average using the Average True Range. Unlike Bollinger Bands, which use standard deviation, Keltner Channels produce smoother bands that are less prone to sudden width changes.
Trailing Stop
A stop-loss that moves automatically in the direction of profit as the market moves in your favor. It locks in gains while staying a fixed distance from the current price.