Average True Range (ATR): Measuring Volatility for Risk Management and Trade Planning

Encyclopedia Classification

Category: Technical Indicators • Risk Management • Volatility Analysis

Discipline: Volatility Measurement • Position Sizing • Stop-Loss Management • Trade Planning

Prerequisites

• Article 180 — Risk Management: The Foundation of Professional Trading

• Article 161 — Trend Analysis: How Professionals Identify Trend Strength, Weakness, and Reversals

• Article 166 — Bollinger Bands: Measuring Volatility, Price Expansion, and Mean Reversion

Related Articles

Position Sizing • Bollinger Bands • Keltner Channels • Volatility • Stop-Loss Placement • Risk-to-Reward

Definition

The Average True Range (ATR) is a volatility indicator that measures the average amount an asset moves over a specified period.

Developed by J. Welles Wilder Jr. in 1978, ATR is one of the most practical tools in technical analysis because it measures movement, not direction.

ATR answers questions like:

• How volatile is this market?

• How much does price typically move?

• Where should a stop-loss realistically be placed?

• How large should my position be?

• Is today's move unusual?

Unlike many indicators, ATR does not predict future price direction.

It simply measures the market's current level of volatility.

Beginner Explanation

Imagine two roads.

One is smooth.

The other is full of potholes.

Driving 60 mph on the smooth road feels comfortable.

Driving 60 mph on the rough road feels dangerous.

The speed is identical.

The conditions are completely different.

Markets behave the same way.

Bitcoin moving:

\$500

per day

is very different from Bitcoin moving:

\$5,000

per day.

ATR measures those road conditions.