What is the ATR?

True range, and why the word true is there

The obvious way to measure a candle's size is high minus low. That undercounts whenever a market gaps, because the jump from the previous close is movement that happened and is not inside the candle.

True range takes the largest of three distances: the candle's own high to low, the previous close to this high, and the previous close to this low. On a candle with no gap the first is largest and the answer is just the range. On a gap the calculation catches the jump.

The ATR is then a running average of that value, fourteen periods by default. Wilder's smoothing keeps thirteen fourteenths of the previous reading and adds one fourteenth of the new true range, so no candle ever leaves the calculation completely. That is why one very large candle keeps the ATR high long after it has left the screen.

What it is genuinely for

Knowing what normal looks like. An ATR of forty points says this market usually covers about forty points in a candle. A move of thirty is unremarkable; a move of two hundred is not. Without that number, big and small are just impressions.

Comparing markets that are not comparable. Two hundred points means nothing until you know whether the ATR is twenty or two thousand. The ATR converts a raw distance into a number of typical candles.

Giving a stop enough room. This is where it earns its keep. A stop closer than one ATR is a stop inside the market's ordinary noise, and it will be reached by movement that means nothing. The guide on the risk reward ratio explains why moving a stop closer to improve a number is the most expensive habit attached to it, and the ATR is how you check whether you are doing exactly that.

What it is not for

It has no direction. A rising ATR in a crash and a rising ATR in a rally are identical readings, exactly as with the ADX, and for the same reason: both measure a property of the movement rather than its side.

It also has no levels. There is no high ATR or low ATR in the abstract, because forty points is enormous on one market and negligible on another. The only meaningful comparison is the ATR of a market against its own recent ATR.

And it is not a volatility forecast. A rising ATR says recent candles have been larger than the ones before. Whether the next ones continue is not part of the calculation.

Reading the ATR against itself

The useful reading is comparative. An ATR at half its own average of recent months means the market has gone quiet, and quiet does not last, which is the same observation a Bollinger Band squeeze makes from a different calculation.

An ATR at three times its usual level means the current movement is extraordinary for this market. Extraordinary rarely holds either: the reading itself usually settles back towards its own average. What it says nothing about is price, which can go quiet again without giving back a single point of the move.

Questions people ask

What is a good ATR value?

There is no such thing across markets, because the number is in the price units of whatever you are looking at. The only useful comparison is a market's ATR against its own recent history.

Does the ATR tell you the direction?

No, and it is not designed to. A large candle up and a large candle down produce the same true range. Direction has to come from the chart itself.

How do you use the ATR for a stop?

As a floor rather than a formula: a stop closer than about one ATR sits inside the market's ordinary movement and will be reached by noise. Where it actually belongs is where the idea would be wrong, which is a question for the chart, not for the indicator.

What are the best ATR settings?

Fourteen periods is the default. Shorter settings track recent conditions more closely and jump around more; longer ones are steadier and slower to notice a change in conditions.

Reading room from a screenshot

Trading AI reads a photo or a screenshot of any chart and returns the key levels, the market structure and a full trade plan with the risk it carries. The distances in that plan come from the chart in the image, so the room around a level is measured on the market you were actually looking at.

Why a stop needs room, and where it belongs instead: What is the risk reward ratio?

The other indicator that measures a property of movement and not its side: What is the ADX?

The same quiet stretch, measured as a narrowing envelope: What are Bollinger Bands?

The jump the word true in true range exists for: What is an opening gap?

This page is educational. It is not financial advice, and nothing here is a recommendation to buy or sell anything.