Average true range (ATR)

Created by J. Welles Wilder, the ATR starts with the true range of each candle: the largest of the current high minus low, the high minus the previous close, or the previous close minus the low. Averaging that over a period, usually 14, gives the ATR, expressed in price units rather than percentages. A rising ATR means candles are getting larger; a falling one means the market is calming down.

The ATR does not indicate direction. Its main use is practical: setting stops at a multiple of ATR, such as 1.5 or 2 times, keeps them outside normal noise, and dividing the amount at risk by that stop distance gives a position size that adapts to volatility. Trailing stops based on ATR, sometimes called chandelier exits, follow the same logic.

Because it is measured in price, ATR values cannot be compared directly between assets with different prices; dividing by price gives a percentage version. It also reacts with a lag, so a sudden spike in volatility can blow through an ATR-based stop.