Average True Range (ATR)

Name Type Prerequisite Use Cases
Average True Range (ATR) Volatility EMA Setting volatility-based stop losses.

Definition

The Average True Range (ATR) is a technical analysis indicator that measures market volatility. It is typically derived from the 14-day simple moving average of a series of true range indicators.

Mathematical Equation

\[ \begin{align} TR &= \max[(H - L), |H - C_{prev}|, |L - C_{prev}|] \\ ATR &= \text{SMA}(TR, n) \end{align} \]

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Moves independently as an absolute value measuring market volatility, regardless of trend direction.

Visualization

ATR

Trading Significance

  1. Volatility Measurement: High ATR = High Volatility. Low ATR = Ranges.

  2. Stop Loss: A multiple of ATR is often used to set stop-loss levels (e.g., 2x ATR).