Average True Range (ATR)
Also called: ATR, True range, ATR indicator, Ortalama gerçek aralık, ATR göstergesi
ATR measures the average range of the last 14 candles; it has no direction and is used to size stop distance and position size.
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What does ATR measure?
ATR is a volatility measure developed by Welles Wilder. For each candle you first find the true range, the largest of three distances: high to low, high to the previous close, and low to the previous close. Including the previous close means gaps between candles count too.
ATR is the average of those true ranges. The standard setting is 14 periods, smoothed with Wilder's method: each new candle enters the average with a small weight, so ATR changes slowly.
ATR is read in price units. If ATR on the EUR/USD 1-hour chart is 0.0012, a candle has moved 12 pips on average over the last 14 hours. On gold the number is a few dollars, on a stock perhaps a few cents; compare each chart with its own history.
ATR has no direction. Rising ATR means price is moving harder, whether up, down or both.
How to use ATR for stops and position size
Its main job is stop distance. If the stop is close enough for an ordinary candle to reach, you get stopped out without the idea being wrong. With hourly EUR/USD ATR at 12 pips, a 6-pip stop sits inside normal noise.
The order matters: put the stop on structure first, then check it with ATR. Say you're considering a buy, the last low is 1.0840 and entry is 1.0858. A stop just under the low at 1.0836 is 22 pips, about 1.8 times ATR. An ordinary candle won't reach it, and if price does, the idea is broken.
Position size comes from that distance. With a 5,000 dollar account risking 1 percent per trade, you accept losing 50 dollars. On a 22-pip stop that is about 2.27 dollars per pip, roughly 0.22 lots on EUR/USD. If ATR rises and the stop grows to 40 pips, the lot size shrinks and the risk stays at 50 dollars. 1R is the same money either way.
ATR also works for a trailing stop. Keeping the stop two ATRs behind the latest close widens it when volatility rises and tightens it when volatility falls.
Try it on a chart
There is no ATR line on this chart. What ATR measures is candle width, and you can see that directly here: look at the size of the candles, then look for a clear high or low you could anchor a stop to.
Your turn: read the chart and make your call.
No sign-up needed. Take a guess; when the chart opens, you'll see why.
The most common ATR mistake
Reading ATR as a direction indicator. Rising ATR doesn't mean the trend is getting stronger; it rises in violent two-way chop as well. High ATR only says candles are bigger, not who is winning.
Placing the stop by ATR alone. One and a half ATRs below entry is a number, not a level. If that number leaves the stop just above the last low, it sits exactly where price is likely to visit. Structure first, then ATR.
Not cutting size when ATR rises. If volatility doubles and you keep the same lot size, the same structural stop costs you twice as much. If the stop widens, the size has to shrink. Skip that and you lose small on quiet days and big on busy ones, and your results never compare cleanly in R.
When does ATR mislead?
In wide, structureless markets. When price swings up and down in big candles, ATR is high but there is no clear high or low to lean on. ATR tells you how wide the stop needs to be, not where it goes. Wherever you put it, it is either too close or so far away that the position becomes pointlessly small.
Around news. A big release spikes ATR in one candle and keeps the average inflated for the candles that follow. Use that inflated value in a market that has calmed down and your stop ends up wider than it needs to be.
Across sessions. ATR measured during the Asian session goes stale at the London open. Setting stops for busy hours from a quiet-hours average leaves them too tight. Comparing with the same hour on previous days is a fairer measure.
Frequently asked questions
What does a high ATR mean?
It means candles have recently been wider than usual, so price is moving harder. It says nothing about direction. In practice, high ATR means a wider stop and a smaller position to take the same risk. If structure is unclear as well, high ATR is a sign of uncertainty more than opportunity.
How do you set a stop with ATR?
A common method puts the stop 1.5 or 2 ATRs beyond entry. A sounder approach places the stop on structure first, a little beyond the last low or high, and then compares that distance with ATR. If it is under one ATR, an ordinary candle can probably reach it. Then size the position to that distance, so 1R is the same amount on every trade.
Why is the ATR setting 14?
Fourteen periods is the setting Welles Wilder used, and it is the default on most platforms. A shorter setting makes ATR more sensitive to recent candles; a longer one slows it down. Some intraday traders pick shorter settings. Whatever you choose, ATR says the same thing: how wide candles are, not where they are going.
