Average true range
The average “true range” (which accounts for gaps between sessions) over a lookback period — a straightforward measure of how much a security typically moves, used for setting stop-losses and position sizing as much as for reading trend.
What the numbers mean
Fourteen is the number of bars averaged, using true range — the greater of the current high-low, or either extreme measured against the previous close, so overnight gaps are counted. Shorter settings react quickly to a volatility shock; longer ones describe the background level.
- 14 — Wilder's default on daily charts
- 20 — a slightly steadier background reading
- 7 — reacts quickly to a volatility shock; used intraday
- 2× or 3× ATR — typical stop distances
- True range counts overnight gaps, which plain high-minus-low does not
How it is used
Mostly used for sizing and stops rather than direction: a stop placed two or three ATRs away adapts automatically to how much the security actually moves, and position size can be scaled so each trade risks the same amount regardless of volatility.
- Stop placed 2–3 ATRs away → adapts automatically to how much the security moves
- Position size set so one ATR equals a fixed dollar risk → uniform risk across trades
- ATR expanding → the ride is getting rougher, direction unspecified
- ATR contracting to multi-month lows → compression that often precedes a large move
How it relates to everything else
ATR is the volatility input behind a surprising amount of this reference: Keltner channels, STARC bands, Supertrend and ATR-based Zig Zag all size themselves by it. It is also the standard bridge between analysis and risk — the same number that widens a channel is the one that sets the stop and the position size.
- Feeds Keltner channels, STARC bands and Supertrend
- ATR + ADX → size of swings plus how directional they are
- Divide ATR by price to compare volatility across different securities
- Never indicates direction — only magnitude
What to watch for
ATR is a magnitude, never a direction — a rising ATR says the ride is getting rougher, not which way. It is in price units, so comparing it across securities requires dividing by price first.