Average True Range (ATR)
Original schematic showing the guide's principal visual relationships.
True Range = max(H−L, |H−previous C|, |L−previous C|); ATR is its Wilder-smoothed average.
Formula and components
A direction-neutral measure of average range that includes overnight gaps.
True Range = max(H−L, |H−previous C|, |L−previous C|); ATR is its Wilder-smoothed average.
How it works
The indicator transforms price, range, or volume observations over a selected lookback. Shorter settings react faster but create more noise; longer settings respond more slowly and emphasize the underlying regime. Always compare the reading with price structure and timeframe.
How to read it
Rising ATR indicates expanding movement and falling ATR indicates contraction. ATR is commonly used to normalize stops or position risk.
Practical example
If 14-day ATR rises from 2 to 3, the market's typical daily range has expanded by about 50%. ATR can scale stops or position size, but it does not say whether the next move will be up or down.
Confirmation checklist
Compare the current range with its own history and distinguish expansion from direction. Volatility can increase during both advances and declines.
Limitations and false signals
ATR measures magnitude, not direction, and absolute ATR cannot be compared fairly across differently priced securities.
Limitations and false signals
Frequently asked questions
What does this pattern or indicator describe?
A direction-neutral measure of average range that includes overnight gaps.
How should the signal be confirmed?
Rising ATR indicates expanding movement and falling ATR indicates contraction. ATR is commonly used to normalize stops or position risk. Compare the current range with its own history and distinguish expansion from direction. Volatility can increase during both advances and declines.
What can cause a false signal?
ATR measures magnitude, not direction, and absolute ATR cannot be compared fairly across differently priced securities.