Level 2 · Lesson 7 / 11 · English
Average True Range (ATR)
4 min reading · Exercises take additional time
0 of 11 lessons completed for this visit
Average True Range measures the typical size of recent true ranges, including movement relative to the previous close. It is a volatility measure, not a directional signal. The related chart is computed from hypothetical bars to demonstrate how ordinary ranges and gaps affect the calculation.
What you will learn
- Calculate true range using all three candidate distances.
- Explain conventional 14-period Wilder smoothing.
- Use volatility context without treating ATR as a loss boundary.
Illustrative educational chart · Not live market data
Why true range differs from high minus low
For each completed bar, true range is the maximum of high minus low, absolute high minus previous close, and absolute low minus previous close. The extra comparisons capture movement from the previous close when the new bar gaps. All three candidate distances are nonnegative, and the result is expressed in the instrument’s price units.
The first available bar lacks a previous close unless earlier data are supplied. Some implementations use high minus low for that bar, while others begin later. Session definitions and data sources can affect gaps, especially across weekends or market closures. A large true range describes realised movement in that interval, not a forecast for the next interval.
From true range to ATR
A conventional ATR uses 14 periods and Wilder smoothing. Seed it with the arithmetic mean of 14 true ranges, then update as ATR = (previous ATR × 13 + current true range) ÷ 14. This smoothing uses a newest-observation weight of 1/14, not the 2/15 weight of a conventional period-14 EMA.
Some platforms offer SMA- or EMA-smoothed ATR variants. Their responsiveness differs, so record the method. A shorter period generally responds more sharply to volatility changes, while a longer period reacts more gradually. A high ATR can occur during either a rising or falling market, and a low ATR does not establish that conditions are safe.
Risk applications and limitations
ATR can help compare a proposed price distance with recent movement. A hypothetical stop two ATRs away is wider when recent volatility is higher. However, two ATRs is not a guaranteed maximum excursion or a probability-based confidence boundary. News shocks and gaps can exceed recent ranges, and stop execution can be worse than the specified price.
If using ATR to determine stop distance, calculate position size from the monetary loss at that distance, including contract value and relevant currency conversion. Wider stops without smaller exposure increase potential loss. Raw ATR values are not directly comparable across different price scales; ATR divided by price can provide a relative measure, but it still does not predict direction or eliminate regime risk.
Key terms
- True range
- The maximum of the bar range and its two distances from the previous close.
- ATR
- A smoothed average of true range values.
- Gap
- A discontinuity between successive observed trading prices or intervals.
Hypothetical worked example · Not live market prices
Hypothetical gap-aware true range
- Assume previous close 100, current high 105 and current low 102.
- High − low = 3; |105 − 100| = 5; |102 − 100| = 2.
- True range = max(3, 5, 2) = 5. This single value is not yet a 14-period ATR.
| Candidate | Value |
|---|---|
| High − low | 3 |
| Absolute high − previous close | 5 |
| Absolute low − previous close | 2 |
| True range | 5 |
Simplified educational calculations. Costs, slippage and provider-specific adjustments apply where relevant; these are not actual returns.
Common mistakes to avoid
- Using only high minus low and overlooking gap movement.
- Interpreting a rising ATR as an upward price forecast.
- Assuming an ATR-based stop guarantees its maximum monetary loss.
Lesson summary
ATR summarises recent movement size, including gaps. It can inform risk planning, but direction, position sizing and execution uncertainty require separate treatment.
Practical exercise
If prior ATR is 4 and the next true range is 5, calculate a Wilder period-14 update: (4 × 13 + 5) ÷ 14 = 57/14, approximately 4.0714.
Knowledge check
Check your understanding
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Related lessons
Financial education, not personal investment advice. Leveraged Forex and CFDs can lead to substantial losses. Demo practice and correct quiz answers do not guarantee trading success.