ATR (Average True Range): what it measures and how to size a stop with it

What it measures

ATR measures how far an instrument typically travels in one bar, including any gap from the previous close. It is a pure volatility measure with no directional content whatsoever — a rising ATR says the market is moving more, not that it is moving up.

Its main practical use is scaling: stop distances, position sizes and band widths expressed in ATR adapt automatically as conditions change.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   For each bar, true range is the largest of: the high minus the low, the absolute distance from the high to the previous close, and the absolute distance from the low to the previous close.

2. 2

   The gap terms are what make it "true" range — a bar that opens far from the previous close has travelled that distance even if its own high-to-low span is small.

3. 3

   Smooth the true range series with Wilder’s method: seed with the simple average of the first values, then update with a running 1/period average.

Settings

Fourteen is the original and works well as a stop-distance unit. Shorter periods make ATR react faster to a volatility spike, which is useful for sizing during a breakout and unstable for placing stops.

How to read it

• ATR has the units of price, so compare it to price to make it meaningful: an ATR of 800 on a 76,000 instrument is a roughly one percent bar.
• A stop closer than one ATR from entry will be hit by ordinary noise. That is not bad luck, it is arithmetic.
• Expanding ATR during a move means participation is increasing. Expanding ATR at the end of a long trend often marks capitulation rather than continuation.
• ATR cannot tell you where to enter. It can only tell you how much room a position needs.

Where it misleads

Related indicators