Key Takeaways
- Definition: ATR averages true range over a chosen period and reports the result in price units. It measures how far price travels, not where it goes.
- Formula: True range is the largest of three measurements, and the previous close decides the value on gap days. Wilder's smoothing weights the newest bar at 1/14.
- Reading values: A rising ATR means ranges are expanding and a falling ATR means they are contracting. A raw value cannot be compared across assets without normalising it as a percentage of price.
- Application: Stops sit a multiple of ATR from entry, and position size follows from the risk budget divided by that stop distance.
What Is the Average True Range (ATR)?
ATR is the average distance price travels per bar over a specified period, expressed in the instrument's own price units.
Wilder designed the measure for markets that gap. In commodity markets, price can open far above or below the previous close, and a range built only from the current high and low records none of that jump. True range therefore includes the previous close as a reference point, and ATR averages those wider values.
Because the formula uses absolute values, a sharp selloff and a sharp rally of equal size produce the same reading. That is why ATR is a descriptive, lagging measure, normally paired with something that addresses price direction.
The Average True Range Formula, Step by Step
True range is the largest of three measurements, and ATR is the smoothed average of those values across the chosen period. Wilder needed one number per bar that captured the full distance price travelled, including any jump from the previous close.
Step 1: Calculate the True Range
True range for a single bar is the greatest of three values, the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. Absolute value means the distance is recorded without a sign, because Wilder was measuring how far price moved rather than which way.
Which term wins depends on the shape of the bar:
- When the previous close sits inside the current bar's range, high minus low is the largest value.
- When price gaps up, the current low sits above the previous close, and the high-minus-previous-close term takes over.
- When price gaps down, the current high sits below the previous close, and the low-minus-previous-close term takes over.
The same rule is often written more briefly as the higher of the high and the previous close minus the lower of the low and the previous close, which is easier to compute in a spreadsheet.
Step 2: The First ATR Is a Simple Average
The first ATR value is the arithmetic mean of the first 14 true range values, because no previous ATR exists. That first print is not produced by Wilder's formula at all, and it sets the starting point for every later value.
Step 3: Subsequent ATR Values Use Wilder's Smoothing
Subsequent ATR values apply Wilder's smoothing, multiply the previous ATR by 13, add the current true range, and divide the total by 14.
TR = max( High - Low, |High - Previous Close|, |Low - Previous Close| )
ATR = ( (Previous ATR x 13) + Current TR ) / 14
The 13 and the 14 are weights, not arbitrary constants. The newest bar contributes 1/14 of the new value and the entire prior history contributes the remaining 13/14. That weighting produces a smooth line, and it is also the mechanical reason the indicator lags.
Worked Example: 15 Bars, Including Two Gap Days
The table below uses an illustrative daily series. Every true range is shown, the first ATR appears at bar 14, and bar 15 demonstrates the smoothing step.Bar 1 has no previous close, so its true range is simply 102.00 minus 99.00. Bar 2 is the first gap, the bar's range is 2.00, but the previous close of 100.50 sits below the low of 101.00, so the high-minus-previous-close term gives 2.50 and wins. A high-minus-low table would have recorded 2.00.
| Bar | High | Low | Previous close | True range | ATR |
|---|---|---|---|---|---|
| 1 | 102.00 | 99.00 | none | 3.00 | |
| 2 | 103.00 | 101.00 | 100.50 | 2.50 | |
| 3 | 104.00 | 101.50 | 102.00 | 2.50 | |
| 4 | 105.00 | 102.00 | 103.00 | 3.00 | |
| 5 | 106.00 | 103.00 | 104.00 | 3.00 | |
| 6 | 103.00 | 99.50 | 105.00 | 5.50 | |
| 7 | 101.00 | 98.00 | 100.00 | 3.00 | |
| 8 | 100.00 | 96.00 | 99.00 | 4.00 | |
| 9 | 97.00 | 94.00 | 96.50 | 3.00 | |
| 10 | 98.00 | 95.00 | 95.00 | 3.00 | |
| 11 | 99.50 | 96.00 | 97.00 | 3.50 | |
| 12 | 104.00 | 98.50 | 99.00 | 5.50 | |
| 13 | 105.00 | 102.00 | 103.00 | 3.00 | |
| 14 | 106.00 | 103.00 | 104.00 | 3.00 | 3.39 |
| 15 | 107.00 | 104.00 | 105.50 | 3.00 | 3.36 |
Bar 6 is the clearest gap. Price closed at 105.00 and the next bar ranged between 99.50 and 103.00, entirely below that close, so the low-minus-previous-close term gives 5.50 against a bar range of 3.50. Bar 12 shows the opposite lesson, it is a wide bar at 5.50, but the previous close of 99.00 sits inside its range, so high minus low wins.
The first ATR sums bars 1 to 14, which total 47.50, and divides by 14 to give 3.39. Bar 15 applies the smoothing step, 3.39 multiplied by 13 is 44.11, plus the current true range of 3.00 is 47.11, divided by 14 is 3.36.
How to Read Average True Range Values
ATR Level, Rising ATR and Falling ATR
The absolute level tells you the current average range. A reading of 3.39 on a 100 dollar instrument means recent bars have averaged about 3.39 in range.
The slope tells you whether volatility is building or fading. Expansion often accompanies the start of a directional move, and contraction often accompanies consolidation. In volatile markets, ATR rises quickly. In less volatile markets, lower ATR values can persist for weeks.
Why One ATR Value Cannot Be Compared With Another Asset
ATR is denominated in price units, so it scales with the asset's price. A stock trading near 25 dollars will usually show a much smaller ATR than a stock trading near 250 dollars, even when the two move by similar percentages. A stock that fell from 70 to 20 will also show ATR values on a different scale before and after the decline, which makes the historical series hard to read as one continuous measure.
ATR%: The Normalised Way to Compare Volatility
Dividing ATR by price converts the raw value into a percentage, which makes price volatility comparable across instruments and across time. The convention used here is ATR divided by the closing price, multiplied by 100. Any consistent convention works, because the purpose is relative comparison rather than an absolute standard.
| Asset | Price | ATR | ATR as % of price |
|---|---|---|---|
| Nvidia | 115.74 | 7.20 | 6.2% |
| Johnson & Johnson | 162.84 | 2.73 | 1.7% |
| S&P 500 index | 5,614.56 | 100.34 | 1.8% |
Figures published by Charles Schwab in April 2025, describing prices in late March 2025. Percentages are rounded.
The table answers the question a raw ATR cannot. At 6.2 percent of price, Nvidia's 7.20 describes an instrument moving roughly six percent of its value in an average session, a different volatility regime from the 1.7 percent reading on the second row. Gauging market volatility across instruments requires the proportional figure, not the raw value.
Average True Range Bands and Volatility Channels
There is no single standard indicator called ATR bands. The phrase usually refers to bands plotted a set multiple of ATR above and below a moving average, which is the construction used by Keltner Channels.
What "ATR Bands" Usually Means
A band is built by taking a moving average of price and adding or subtracting a multiple of ATR. A common configuration uses a 20-period moving average and a 2x ATR multiplier, though defaults differ by platform.
The multiplier controls width and a larger multiplier produces bands that price reaches less often, and a smaller multiplier produces bands that price crosses frequently. In highly volatile markets the bands widen without any change to the period setting.
ATR Bands vs Bollinger Bands
Both are volatility envelopes around a moving average. They differ in what drives the width.
| Attribute | ATR bands (Keltner construction) | Bollinger Bands |
|---|---|---|
| Width driver | Average bar range, including gaps | Standard deviation of closing prices |
| Responds to gaps | Yes, through true range | No, closes only |
| Typical use | Trend following, breakout, trailing reference | Mean reversion, squeeze detection |
The practical consequence is responsiveness. A gap widens an ATR band immediately because true range captures it, while a Bollinger Band built from closing prices alone does not react in the same way. Neither indicator is a directional signal.
How to Use the ATR Indicator in a Trading Strategy
ATR is used to size risk rather than to generate entries. Stops are placed a multiple of ATR from entry, and position size is then derived from the risk budget divided by that stop distance.
ATR Stop-Loss Placement
An ATR stop sits a chosen multiple of the current ATR away from entry, so the distance adapts to volatility. It reads average range rather than support and resistance levels, which is why it can sit at a level that looks arbitrary on the chart yet is proportional to how the instrument has been trading.
Using the worked example above, with an ATR of 3.39 and an entry at 100.00, a 1x stop sits at 96.61, a 2x stop at 93.22 and a 3x stop at 89.83. The multiplier decides how much normal price fluctuation the trade can absorb before it is closed.
ATR Position Sizing Formula
Position size is the risk budget divided by the stop distance, adjusted for the instrument's point value.
Position size = Risk budget / (ATR x Multiplier x Point value)
For a share position the point value is 1. With 50,000 in equity, a 1 percent risk budget of 500, an ATR of 3.39 and a 2x multiplier, the stop distance is 6.78, so the position is 500 divided by 6.78, which is 73 shares after rounding down.
For a futures contract with a hypothetical point value of 50, the risk per contract is 6.78 multiplied by 50, which is 339. The same 500 budget then allows 1.47 contracts, so one contract.
The point value must come from the instrument's contract specification, not from the indicator.
Choosing the Multiplier: 1x, 1.5x, 2x or 3x
There is no optimal multiplier in the abstract. Each choice trades stop-out frequency against position size at a fixed risk budget.
| Multiplier Stop distance (ATR 3.39) Stop price from 100.00 Shares at 1% of 50,000 Stop-out sensitivity |
|---|
| Multiplier | Stop distance | Stop price |
|---|---|---|
| 1x | 3.39 | 96.61 |
| 1.5x | 5.09 | 94.91 |
| 2x | 6.78 | 93.22 |
| 3x | 10.17 | 89.83 |
The pattern is consistent. A wider stop reduces the chance of being closed by normal price fluctuations and reduces the position size the same risk budget can support. These are arithmetic consequences, not backtested outcomes, so no multiplier is superior without a defined test. A trading plan should state the multiplier and the risk budget before the trade.
ATR Trailing Stops
A trailing stop recalculates as ATR changes, so the exit level follows both price and volatility. If ATR rises from 3.39 to 4.20 and the multiplier is 2, the stop distance widens from 6.78 to 8.40. The trade-off matches fixed ATR stops, more room during a volatile advance, more of the gain given back on the reversal.
ATR for Breakout Confirmation and Consolidation
Expanding ATR alongside a price break suggests the move carries conviction, because the average range is widening as price leaves its prior range. Contracting ATR during sideways price action describes consolidation. Neither reading confirms direction, and ATR does not identify support and resistance levels.
ATR Settings: Period, Timeframe and Which Length to Use
Short vs Long Periods
A short period weighs recent bars more heavily and turns faster. It also produces a noisier line, which changes the stop distance on almost every bar.
A long period is smoother and slower, so it can describe a volatility regime that has already ended. For 2 to 10 periods as suitable for recent volatility and 20 to 50 for longer-term volatility, and those ranges describe responsiveness rather than accuracy. The choice should follow the trading style rather than the chart's default.
Matching the ATR Period to Your Chart Timeframe
The period is counted in chart bars, so the same setting covers very different amounts of time on different charts.
| Chart timeframe | Period commonly used | Time covered | Main drawback |
|---|---|---|---|
| 5-minute | 14 | About 70 minutes | Sensitive to intraday noise |
| 15-minute | 14 | About 3.5 hours | Still dominated by session noise |
| Hourly | 14 | About 14 hours | Misses multi-session structure |
| Daily | 14 | 14 sessions | Slow to reflect a regime change |
| Weekly | 14 | 14 weeks | Very slow, useful only for long horizons |
A 14-period ATR on a 5-minute chart and a 14-period ATR on a daily chart share a setting and nothing else. The first describes the last hour, the second describes the last three weeks.
Settings only matter if you can find them, which is where platforms diverge.
How to Setup ATR on MT4/MT5
MetaTrader 4 and MetaTrader 5 ship with Average True Range as a standard indicator with a default period of 14, available through the Insert menu, then Indicators, then Oscillators.
- Open the chart: Select the instrument and timeframe first, because the ATR period is counted in bars on that chart.
- Insert the indicator: Use the Insert menu, then Indicators, then Oscillators, then Average True Range. The same list is available in the Navigator panel with Ctrl+N.
- Set the period: The default is 14. Change it only if the holding period differs from the default, and keep the same value for every comparison on that chart.
- Confirm and place it: Click OK, then drag the ATR line into a separate subwindow so it does not compress the price scale.
Limitations and Common Misreadings of ATR
ATR describes past range, so it lags, it cannot indicate direction, and its absolute value does not compare across assets.
- No directional information. The formula uses absolute values, so rallies and selloffs of equal size produce identical readings.
- Lag by construction. The newest bar contributes only 1/14 of each new value, so a gap registers in true range immediately but reaches the average gradually.
- No cross-asset comparison. Values are denominated in price units, so a 250 dollar instrument will normally print a larger ATR than a 25 dollar instrument at similar percentage volatility.
- Breakdown after structural change. A split, a large price adjustment or a sustained trend that repriced the instrument can make earlier ATR values incomparable with current ones.
One framing error is worth correcting directly. ATR is sometimes described as a trend strength gauge. It is not. It measures the size of price movement, and a wide range can occur inside a trend, against a trend, or in a directionless market. Used in isolation, ATR also does not manage risk effectively, because it supplies one input and the rest of the risk framework has to come from elsewhere.
ATR vs Other Volatility Measures
ATR, standard deviation, Bollinger Bands, Keltner Channels and the VIX all describe volatility, but they measure different inputs and answer different questions.
| Measure | Input | Unit | Question answered |
|---|---|---|---|
| ATR | High, low and previous close over N periods | Price units | How wide is the average bar? |
| Standard deviation | Close-to-close returns | Percent or price units | How dispersed are returns? |
| Bollinger Bands | Moving average plus or minus a multiple of close dispersion | Price units | Where is the price relative to its own dispersion? |
| Keltner Channel | Moving average plus or minus a multiple of ATR | Price units | Where is the price relative to the average range? |
| VIX | S&P 500 option prices | Annualised percentage points | What volatility does the options market expect? |
The distinction that matters most is realised against implied. ATR, standard deviation, Bollinger Bands and Keltner Channels describe movement that has already happened, while the VIX describes expectations priced into options. ATR is also invariant to a constant shift in historical prices, which makes it convenient for back-adjusted futures series.
ATR differs from directional and momentum tools as well. The relative strength index carries directional information that ATR deliberately discards, and indicators such as a moving average or the average directional index are built for trend questions. Use ATR for how much, and use a directional or momentum indicator for which way.
Average True Range Frequently Asked Questions
What does the Average True Range tell you?
It tells you the average size of price movement over the chosen period, in price units, which is a direct measure of market volatility. A rising ATR means ranges are expanding and a falling ATR means they are contracting. It says nothing about direction.
Is ATR good for day trading?
ATR is useful for setting stop distance and position size on intraday charts. It does not generate entries, and short periods are noisy. It works best alongside a tool that addresses direction.
What is 2 ATR in trading?
Two ATR is a distance equal to twice the current ATR value. A stop placed 2 ATR from entry sits twice the average range away, which gives the trade more room than a 1 ATR stop and requires a smaller position for the same risk budget.
How do you use ATR to set a stop-loss and a take-profit?
A common approach places the stop a multiple of ATR below entry and sets the target at a further multiple, so reward and risk are both defined in volatility terms. The multiplier remains a judgement about holding period and risk tolerance.
What is the best ATR period?
There is no universal best period. 14 is Wilder's default, periods of 7 to 10 respond faster, and periods of 20 to 50 describe a slower regime. The right choice matches the holding period being traded.
Why is my ATR different on MT4 and TradingView?
The platforms differ in smoothing method, in how much history they load before the first visible bar, and in rounding. Small differences are expected. Compare ATR values within one platform rather than across two.
