Average True Range
ATR does not predict direction — it measures "how far this market can move in a day", turning stop distances, position sizes and targets from guesswork into arithmetic.
What it is
The Average True Range (ATR), introduced by J. Welles Wilder in 1978, is the average of the last N periods (default 14) of the "True Range". TR = the largest of: high−low, |high−previous close|, |low−previous close| — gaps included. ATR is quoted in price units rather than percentages: it tells you how far this instrument normally travels in one bar, making it the cornerstone of risk-management indicators.
Origin
ATR also comes from Wilder's 1978 "New Concepts in Technical Trading Systems". Building commodity-futures systems, he needed a volatility measure comparable across instruments priced in different units (soybeans vs wheat), so he averaged the "true" range — gaps included — instead of using fixed ticks. Today ATR is the de-facto standard for position sizing and stop placement: the Turtle rules and Elder's Triple Screen both run on it.
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Two steps:
The two "versus previous close" terms exist to capture gaps: if yesterday closed at 100 and today opens at 108, even an intraday range of 108–106 counts as a true range of 8, not 2 — that is what "true" means here. Wilder smoothing keeps ATR from jumping around on single-day anomalies.
Worked example
Two classic risk uses with numbers:
- An instrument has a daily ATR of $2.00. A trend trader places the stop 2×ATR below entry = $4.00 away — giving the trade room to breathe so daily noise cannot knock it out.
- The account accepts $200 of risk on this trade → position = 200 ÷ 4 = 50 units. High-ATR instruments automatically get smaller positions, low-ATR larger ones — volatility parity.
- Another instrument has an ATR of only $0.50, so a 2×ATR stop is $1.00 away → the same $200 risk buys 200 units.
ATR turns "how wide should my stop be" and "how large should my position be" into two ends of the same equation — constant risk, position size automatically scaled to volatility. That is why it is called the cornerstone of risk management: it never tells you what to buy, it governs how you buy.
How to read it
ATR has no overbought/oversold — its readings are comparisons:
| Range | Common interpretation |
|---|---|
| ATR near a 1-year low | Volatility compressed — a coiling range, the incubator of breakouts (same read as a Bollinger squeeze) |
| ATR lifting quickly off lows | Volatility expanding — the typical start of a new trend or a major move |
| ATR at historical highs | Extreme volatility — cut position size, widen stops, or stand aside |
| ATR falling from highs | The move is tiring or consolidating — downshift trend strategies |
ATR is always an absolute value (dollars/points/ticks) — cross-instrument comparison only makes sense as a percentage (ATR ÷ price). A $2 ATR means completely different things on a $20 stock and a $400 stock.
Common signals & usage
Trailing channel stop (Chandelier-style)
Stop = highest high − 3×ATR (long), ratcheting up with new highs — the market's own volatility sets the stop, far more scientific than fixed ticks.
Entry filter
When ATR suddenly spikes to twice its average, stand aside — news-driven spreads and slippage eat strategy edge.
Target placement
Swing target = entry + N×ATR (commonly 2–3) — using the same ruler as the stop keeps the reward/risk arithmetic honest.
Volatility-cycle read
ATR at lows + Bollinger squeeze + ADX low, all together = the eve of a big move; ATR plateauing at highs = the late innings.
Limitations & common mistakes
- ATR is not a direction indicator: it never predicts up or down — any "high ATR = go short" reading is simply wrong. It answers "how volatile", nothing else.
- Lag: a 14-period average follows volatility shifts by 2–3 days — in news-driven moves the current TR dwarfs ATR, so widen stops manually.
- Cross-instrument misreads: ATR absolute values differ wildly across price levels — always convert to a percentage before comparing volatility.
- Wider is not automatically safer: each doubling of the stop halves the position at the same risk — width and size are two ends of one equation.
- Gap-prone instruments: earnings/weekend gaps blow up the "versus previous close" terms — after such gaps, recompute stops from the new ATR.
ATR in MT5
ATR is a built-in MT5 oscillator (single line). The MQL5 function for programmatic use is iATR:
| MQL5 function | iATR() |
| Default period | ma_period=14 |
| Algorithm | Wilder-smoothed (SMMA) TR |
| Display window | Sub-window (readings in price units, e.g. dollars/points) |
| Buffers | 0=main ATR line |
MT5 computes ATR with SMMA (Wilder smoothing), matching the original book. The sub-window axis is in price units — which is why ATR sub-charts look different heights across instruments: not a bug, just different units. For comparisons use ATR ÷ price.
Behavior across timeframes
15-minute
Intraday stops commonly use 1×ATR(14, 15m) — the breathing room is small and both stops and targets tighten accordingly
1-hour / 4-hour
Swing stops at 1.5–2×ATR; ATR also works as the intraday "should I trade today" volatility switch
Daily
The classic arena: 2–3×ATR(14, daily) stops plus the percentage position formula are the standard risk template
Weekly
The "big stop" reference for long-term holdings; a weekly ATR rollover often marks a change in move class
Indicator combinations
ATR pairs with nearly everything (it owns the risk dimension):
- With MA: the MA sets trend direction, ATR sets the stop distance — the simplest two-piece kit: direction plus risk. MA
- With Bollinger Bands: both read volatility — Bollinger structures entries (squeeze/breakout), ATR governs exits (stop/target). BOLL
- With MACD: a MACD cross enters, 2×ATR stops, 3×ATR targets — a complete trend-trading loop. MACD
Symbols commonly watched with ATR
Symbol pages that list this indicator as a common tool:
FAQ
Q What ATR period should I use?
The default 14 (Wilder's original) fits most cases. For intraday, a 14-period ATR on the 1-hour chart is a common equivalent; long-term stops read the daily or weekly ATR directly. Shorter = more responsive to volatility shifts; longer = smoother and numb to spikes.
Q How many ATR multiples should my stop be?
Commonly 1.5–3×: 1–1.5× for intraday (15-minute or 1-hour ATR), 2–3× for swing (daily ATR). Wider stops survive more noise but force smaller positions at equal risk — you are trading stop width against position size, and the reward/risk ratio should stay constant.
Q How does ATR help position sizing?
Formula: position = account risk ÷ (entry − stop). Once the stop distance is defined by ATR, position size becomes inversely proportional to volatility — big-ATR instruments get smaller positions automatically, so every trade risks exactly the same amount (volatility parity). The Turtle rules' Unit mechanism is exactly this.
Q ATR and Bollinger Bands both measure volatility — redundant?
No, the jobs differ: Bollinger turns volatility into a price channel (entry structure: squeeze/breakout), ATR turns it into absolute distance (stop/target/size). One governs getting in, the other getting out — naturally complementary.
Q How do I add ATR in MT5?
Menu: Insert → Indicators → Oscillators → Average True Range, or drag it from the Navigator onto a sub-window. Default period 14; readings are in price units — different values across instruments are normal (different units). For comparisons use ATR ÷ price as a percentage.
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