Average True Range (ATR)

What Is the Average True Range (ATR)?

The Average True Range (ATR) is a tool used in technical analysis to measure how much the price of an asset moves over time, helping traders understand market volatility. Created by J. Welles Wilder Jr., ATR focuses on the size of price movements, not the direction of those movements (whether prices are going up or down).

Key Features of ATR

Volatility Measurement: ATR helps measure the extent of price fluctuations. It tells you how much prices are moving, but not whether they are going up or down.

Adaptive Nature: ATR adjusts based on market conditions. When the market is volatile, ATR values are higher, and when the market is calmer, ATR values are lower. This adaptability makes ATR useful for setting stop-loss levels and determining how much risk to take on a trade.

Applications of ATR

Trade Entry and Exit: Traders use ATR to identify good times to enter or exit trades. If ATR is rising, it may signal increased volatility, making it a good time to enter. If ATR is falling, it could suggest the market is stabilizing, which might indicate a good exit point.

Stop-Loss Placement: ATR reflects market volatility, traders often use it to set stop-loss orders at a multiple of the ATR, allowing for more room for price fluctuations without getting stopped out too early.