ATR (average true range)

ATR (average true range) is a volatility indicator that shows how far price has moved per candle on average over the last N candles (usually 14).

How it works

For each candle you take the true range: the largest of three values, high minus low, the distance from the high to the previous close, and from the low to the previous close. That accounts for gaps between candles. ATR is a smoothed average of these ranges.

ATR is measured in the same units as price: dollars for BTC, pips for a currency pair. It shows size, not direction. A rising ATR means the market has become more volatile, a falling one that it has calmed down.

Its main use is placing stops and sizing positions. A stop 1–2 ATR from entry is less likely to be hit by ordinary noise. When volatility rises, the stop gets wider and the position smaller, so the risk in money stays the same.

Example with numbers

The 14 ATR on the BTC daily chart is $1,500. You place your stop 1.5 ATR = $2,250 from entry. Your risk per trade is $100, so position size = $100 / $2,250 ≈ 0.044 BTC. If ATR rises to $3,000, the position halves for the same risk.

Common mistake

The mistake is using the same fixed stop distance on every market, such as always 1%. On a quiet day that stop is wide, and on a volatile day normal swings will hit it. Tie your stop to ATR and to a level, and size the position from the distance to the stop.

Questions and answers

What is ATR in simple terms?

It is the average size of a candle over a recent period. It shows how much price usually moves.

How do you use ATR for a stop-loss?

Place the stop beyond the nearest level, but no closer than 1–2 ATR from entry. That way normal market noise is less likely to hit it.

Does ATR show trend direction?

No. ATR only measures volatility. A high ATR can come with a strong rally or a strong drop.

ATR (average true range)

How it works

Questions and answers

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