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Indicator

Average True Range

Quantify volatility and expected price movement — ATR is the foundation of institutional stop placement and position sizing.

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Key Takeaways

ATR averages the true range over a period.
True range accounts for current high minus low, gap between current high and previous close, and gap between current low and previous close.
Captures actual tradable movement including gaps.
Used to standardise risk across instruments, set stops, size positions, and adapt to volatility regimes.
ATR is a risk input, not a directional signal.

What It Measures

ATR averages the true range over a period.
True range accounts for current high minus low, gap between current high and previous close, and gap between current low and previous close.
Captures actual tradable movement including gaps.

Institutional Use

Used to standardise risk across instruments, set stops, size positions, and adapt to volatility regimes.
ATR is a risk input, not a directional signal.

Key Signals

Rising ATR signals expanding volatility and higher risk.
Falling ATR signals compression and lower movement potential.
ATR expansion often precedes or confirms breakouts.
ATR contraction signals potential coiling before expansion.

Trading Playbook

Stop placement: set stops at 1.
5x to 2x ATR from entry.
Position sizing: risk a fixed dollar amount divided by ATR to normalise exposure.
In high ATR regimes, reduce size.
In low ATR environments, widen targets proportionally.

When Not to Trade

Do not use ATR as an entry signal.
Avoid new positions when ATR spikes to extremes without structural confirmation.