If you've ever placed a stop loss that was "too tight" and got stopped out before the move went your way — or placed one "too wide" and took an unnecessarily large loss — you've encountered the problem that Average True Range (ATR) solves. ATR is one of the most practical indicators in trading, but most traders either don't use it or use it incorrectly. It's not a directional indicator — it doesn't tell you which way price will move. Instead, it tells you **how much** price is likely to move, which is arguably more important for risk management. ## What Is Average True Range? ATR measures the average range of price movement over a specified period. It was developed by J. Welles Wilder Jr. in 1978 and has become one of the standard tools for measuring market volatility. ### The Calculation True Range (TR) for a single period is the greatest of: 1. **Current High minus Current Low** — today's full range 2. **Absolute value of Current High minus Previous Close** — captures gap up 3. **Absolute value of Current Low minus Previous Close** — captures gap down ATR is then the moving average of True Range over N periods (typically 14): ``` ATR = Moving Average of TR over N periods ``` Most platforms use an exponential or Wilder's smoothing method rather than a simple average. ### What ATR Tells You - **High ATR** = large average price movements = high volatility - **Low ATR** = small average price movements = low volatility - **Rising ATR** = volatility is increasing (often during trends or breakouts) - **Falling ATR** = volatility is decreasing (often during consolidation) ATR is always positive and expressed in price units (dollars, pips, etc.), not percentages. ## 5 Practical Applications of ATR ### 1. Position Sizing The most important use of ATR is determining how large your position should be based on current volatility. **The formula:** ``` Position Size = Risk Amount / (ATR × Multiplier) ``` **Example:** - Account: $50,000 - Risk per trade: 1% = $5