BRYME Money · Indicator lab
ATR explained: measuring movement without predicting direction
True range includes gaps; average true range describes scale, not where price goes next.
Average True Range (ATR) estimates the recent scale of price movement per bar. It captures overnight gaps that a simple high-minus-low calculation misses. It does not predict direction, tell you where to place a guaranteed stop or make a loss limit enforceable.
True range includes yesterday's close
For each completed bar, true range (TR) is the greatest of: high − low; |high − previous close|; and |low − previous close|. Suppose the prior close is 101 and today's high and low are 106 and 103. The three candidates are 3, 5 and 2, so true range is 5, reflecting the gap. A 14-period ATR smooths a series of these ranges; a commonly documented version uses Wilder-style smoothing after an initial average. Charting platforms may differ in seed, session and adjusted data. Fidelity's ATR reference lists this true-range definition and the conventional smoothing calculation.
Turning volatility into a planning distance
Assume a hypothetical market has a completed-bar ATR of 1.80 price units. A research rule using two ATRs as an illustrative distance would produce 2 × 1.80 = 3.60 units. With an illustrative $50 planned price-loss budget and a product worth $1 per price unit, $50 ÷ 3.60 ≈ 13.89 units, which might be rounded down to 13 only if the contract permits that size. Two ATRs is a made-up example parameter, not a recommended stop. Live fills, gap risk, contract multipliers, fees and account-currency conversion are excluded. The position-size tool is a planning aid, not a stop-loss guarantee.
| Question | ATR's answer | Missing information |
|---|---|---|
| How far have recent bars travelled? | Approximate distance for a defined timeframe. | Tomorrow's movement and liquidity. |
| Has movement expanded? | Compare current ATR with its own earlier values. | Direction and why movement changed. |
| Can I cap loss at the ATR stop? | No. | Actual order trigger, gaps, slippage, leverage and fees. |
When the measure misleads
- Different timeframes: a daily ATR and a five-minute ATR have different units of time; they are not directly interchangeable.
- Different prices: ATR in dollars cannot compare a $10 product to a $1,000 product without scaling. ATR ÷ price × 100 produces an ATR percentage for a like-for-like volatility description, not a risk forecast.
- Large news gap: a single event can lift the recent average after the loss has already happened. A historical ATR does not make a future gap improbable.
- Look-ahead in testing: calculate ATR from information available before the decision. Using the full current bar to justify an order placed at the bar's open cheats.
A stop-market can fill through a trigger and a stop-limit can fail to fill; the SEC stop-order bulletin explains this distinction. Pair ATR's measure of movement with the liquidity and session checklist and a realistic loss plan.
Sources and further reading
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General information, not financial advice. Everything on BRYME Money is educational. Trading forex, crypto and derivatives involves substantial risk of loss and is not suitable for everyone. Past performance — including any published research — does not guarantee future results. Never trade money you cannot afford to lose.