Technical & Chart AnalysisATR
Average True Range (ATR)
Wilder's smoothed average of the true range, measuring volatility in price units with no directional information.
What Average True Range (ATR) means
Average True Range measures volatility in price units. True range for a period is the greatest of three values: the current high minus the current low, the absolute difference between the current high and the previous close, and the absolute difference between the current low and the previous close. Including the previous close means gaps are captured rather than ignored. ATR is Wilder's smoothed average of that series, conventionally over 14 periods, and it is expressed in the instrument's own units, so an FX reading is naturally quoted in pips.
ATR carries no directional information whatsoever; a high reading says only that the market is moving a lot. Its main practical use is volatility scaling. Stops are commonly placed at a multiple of ATR beyond the entry so that they sit outside normal noise, and position size is then set so that the ATR-based stop distance equals a fixed percentage of account equity, which normalises risk across pairs and across calm and turbulent regimes. The limitation is that ATR is backward looking and can understate risk immediately before a scheduled news event.
Worked example
If the 14-period ATR on USD/JPY is 0.62, or 62 pips, a trader entering long at 152.40 with a 1.5 ATR stop places it at 151.47 and sizes the position so that the 93-pip risk equals 1% of account equity.
Related terms
- VolatilityThe magnitude of price fluctuation over a period, usually measured as the standard deviation of returns or as an average range.
- Position SizingThe process of choosing how many lots to trade so that a losing trade costs a predetermined amount of capital.
- Stop LossA resting order that closes an open position once price reaches a set level, capping the loss on that trade.
- Trailing StopA stop loss that automatically follows price at a set distance, moving only in the profitable direction.
- Risk Per TradeThe share of account equity a trader is prepared to lose on a single position, normally expressed as a percentage.
Frequently asked questions
What does Average True Range (ATR) mean in forex trading?
Wilder's smoothed average of the true range, measuring volatility in price units with no directional information.
How does Average True Range (ATR) work in practice?
ATR carries no directional information whatsoever; a high reading says only that the market is moving a lot. Its main practical use is volatility scaling. Stops are commonly placed at a multiple of ATR beyond the entry so that they sit outside normal noise, and position size is then set so that the ATR-based stop distance equals a fixed percentage of account equity, which normalises risk across pairs and across calm and turbulent regimes. The limitation is that ATR is backward looking and can understate risk immediately before a scheduled news event.
What is an example of Average True Range (ATR)?
If the 14-period ATR on USD/JPY is 0.62, or 62 pips, a trader entering long at 152.40 with a 1.5 ATR stop places it at 151.47 and sizes the position so that the 93-pip risk equals 1% of account equity.
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