Short Answer
ATR (Average True Range) measures how much an asset typically moves per bar (volatility). It does not tell you whether price goes up or down. Traders use it to place stops and size positions so risk matches current market noise.
Detailed Explanation
ATR was developed by J. Welles Wilder Jr. The True Range for each bar is the largest of:
- Current high minus current low
- Absolute value of (current high minus previous close)
- Absolute value of (current low minus previous close)
ATR is typically a moving average of True Range over n periods (often 14).
Formula (conceptual): True Range = max of the three distances above; ATR = average of TR over the chosen period.
Interpretation
- Higher ATR → more volatility (wider swings).
- Lower ATR → quieter market (tighter range).
- ATR often expands after breakouts and contracts in ranges.
- Use multiples of ATR (e.g. 1.5×–3×) for stop distance, not fixed tick sizes.
Common Uses
- Stop placement: Stops beyond recent noise (e.g. entry ± k × ATR).
- Position sizing: Risk a fixed % of account where $ risk relates to stop distance in ATR terms.
- Filtering: Skip strategies when ATR is too low (chop) or manage risk when ATR spikes.
Settings
| Setting | Typical default | Notes |
|---|---|---|
| Period | 14 | Shorter = more reactive; longer = smoother |
Common Mistakes
- Treating ATR as a directional buy/sell signal.
- Using tiny stops when ATR is high (whipsaws).
- Ignoring timeframe: ATR on 1m vs 1d scales differently.
- Forgetting ATR is absolute (not comparable across very different price levels without context).
ATR in VaultCharts
VaultCharts includes ATR as a volatility tool. Combine it with trend/momentum indicators and price action—not in isolation.