ATR: Average True Range
Also known as: ATR, true range average, Wilder's ATR, ATR indicator
What is it?
Average True Range is a volatility measure: it reports how far an instrument has typically travelled per bar over a lookback window, usually 14 bars, expressed in that instrument's own price units. The word true does real work here. A bar's plain high-minus-low understates the move whenever price gapped, so true range is the largest of three distances - high minus low, high minus the previous close, and the previous close minus the low.
ATR is then the average of that value over the window. On EUR/USD a daily ATR near 82 pips means the pair has recently covered about 82 pips between its extremes on a typical day; on GBP/JPY the same reading might be 140. ATR says nothing about direction, only about distance, and that single property is what makes it useful.
It converts a stop from a number you picked into a number the market justifies. A 30-pip stop looks conservative until you notice it sits well inside one ordinary day's range on an 82-pip instrument, where it will be taken out by noise rather than by the trade being wrong. Placing the stop at a multiple of ATR keeps that logic intact when volatility doubles.
Why it matters: ATR tells you how far an instrument normally moves per bar, so a stop can sit outside ordinary noise instead of at a round number you chose.
ATR(14) = average of True Range over the last 14 bars, where True Range = max(high - low, high - prev close, prev close - low)
It sets how much room a trade is given, which decides how often an otherwise correct position is stopped out by normal movement.
Real-world example
EUR/USD daily ATR sat near 82 pips while GBP/JPY ran near 140 - the same 30-pip stop is a considered distance on one instrument and inside a single ordinary bar on the other.
How SignalBots handles it
SignalBots derives stop distance from current volatility rather than a fixed pip count, so the same rule keeps its meaning between a quiet range and a fast session. See /risk-warning.
Pro tip
Express the stop as a multiple of ATR rather than a fixed number of pips, so the risk logic survives unchanged when volatility doubles overnight.
Common pitfalls
Reading a rising ATR as a bullish sign. ATR measures distance travelled, not direction, and it rises just as fast in a crash as in a rally.
Frequently asked questions
What ATR period should I use?
Fourteen is the default Wilder proposed and remains the common choice. A shorter period such as 7 reacts faster to a volatility change, a longer one such as 21 is steadier - the trade-off is responsiveness against stability, not accuracy.
Is a high ATR good or bad?
Neither. A high ATR means larger moves in both directions, which widens the stop you need and the target you can reach. It changes position size rather than the quality of the setup.
How do I turn ATR into a stop distance?
Multiply it, typically by 1.5 to 2. On an instrument with an 82-pip ATR, a 1.5x stop sits 123 pips from entry, and your lot size then follows from that distance and your risk per trade.
Can ATR be compared between instruments?
Not directly, because it is quoted in each instrument's own units. To compare, divide ATR by the current price to get a percentage, which puts a 140-pip yen pair and a 40-cent stock on the same scale.
Does ATR predict a breakout?
It does not predict direction or timing. A sustained contraction in ATR does tell you the market is compressing, and traders often watch for expansion afterwards, but that is context rather than a signal and capital is at risk either way.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
