Average True Range (ATR): How to Read It
Average True Range measures how much an asset typically moves in a period, including gaps. It does not show direction, but it is extremely useful for sizing positions and placing stops.
The formula
Common settings: 14 periods
How to read it
- A higher ATR means larger typical price swings.
- A lower ATR means quieter, calmer price action.
- Rising ATR often accompanies breakouts or sell-offs.
- ATR is in price units, so it is specific to each asset.
- ATR helps set stops beyond normal noise.
Typical signals
- Placing stops at a multiple of ATR, such as 2 x ATR, from entry.
- ATR expansion confirming the strength of a breakout.
- Falling ATR warning that a market is entering a quiet phase.
Pitfalls to avoid
- Gives no information about direction.
- Cannot be compared directly between assets with different prices.
- Spikes after big moves may overstate future volatility.
Strategies that use it
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How do I use ATR for stops?
Many traders place stops a multiple of ATR, such as 1.5 or 2 times, away from their entry.
Why include gaps?
True range includes gaps from the previous close so overnight jumps count as volatility.
Does high ATR mean the price will fall?
No. ATR measures movement size, not direction.
Works well with
Supertrend
Supertrend is a trend-following line plotted above or below price using ATR-based bands. It flips sides when price closes through it, making trend direction easy to see at a glance.
🧭Keltner Channels
Keltner Channels draw bands around an EMA using a multiple of ATR. They create a smoother volatility envelope than Bollinger Bands and help identify trends and stretched moves.
🛤️Donchian Channels
Donchian Channels plot the highest high and lowest low over a lookback period, with a middle line between them. They are a classic tool for spotting breakouts to new highs or lows.