The Average True Range (ATR) is a volatility indicator that shows how much an instrument’s price typically moves over a set number of periods, usually 14. It is measured in price units, such as pips or dollars, and says nothing about direction. Traders use the ATR to judge current volatility, set stop distances and size positions, but it reacts to past moves and cannot forecast sudden spikes.
Key takeaways
- The ATR was introduced by J. Welles Wilder Jr. in 1978 and averages the “true range” of each period.
- A rising ATR means price ranges are widening; a falling ATR means they are narrowing. Neither indicates up or down.
- Common uses include volatility-based stop-losses, position sizing and filtering out very quiet or very active conditions.
- The ATR is backward-looking and absolute, so readings differ widely between instruments and timeframes.
What Is the ATR Indicator?
The Average True Range measures volatility: how far price moves, on average, during each candle. J. Welles Wilder Jr. introduced it in his 1978 book New Concepts in Technical Trading Systems, originally for commodity markets. It is now standard on most trading platforms, including MetaTrader 4 and MetaTrader 5.
The key idea is simple. A market that moves 120 pips a day behaves differently from one that moves 40 pips a day, even if both are trending in the same direction. The ATR puts a number on that difference.
Volatility itself is covered in more depth in CMS Prime’s guide to market volatility.
How the ATR Is Calculated
The ATR is built in two steps.
Step 1: Find the true range
The true range (TR) for each period is the largest of three values:
- The current high minus the current low.
- The absolute value of the current high minus the previous close.
- The absolute value of the current low minus the previous close.
Including the previous close captures gaps. If a market closes at 1.1000 and opens the next day at 1.1050, the simple high–low range would miss part of that move. The true range does not.
Step 2: Average the true range
The ATR then averages the true range over a set number of periods, most commonly 14. Wilder used a smoothing method:
ATR today = [(ATR yesterday × 13) + TR today] ÷ 14
This gives each new period a modest influence, so the ATR changes gradually rather than jumping with every candle.
A simple example
Suppose EUR/USD has an ATR(14) of 0.0065 on the daily chart. That means the pair has moved about 65 pips per day on average over the last 14 days. If a day’s true range is 0.0110, or 110 pips, the ATR will rise slightly on the next reading, reflecting the wider move.
How to Read the ATR
The ATR appears as a single line in a separate window below the chart.
|
ATR reading |
What it describes |
What it does not describe |
|
Rising ATR |
Candles are getting larger; volatility is expanding |
Whether price is rising or falling |
|
Falling ATR |
Candles are getting smaller; volatility is contracting |
That a breakout or reversal is about to happen |
|
High ATR relative to its history |
Unusually wide ranges, often around news or stress |
That the move will continue |
|
Low ATR relative to its history |
Quiet, compressed conditions |
That volatility will stay low |
Because the ATR is measured in price units, it only makes sense in context. An ATR of 0.0060 on EUR/USD and an ATR of 25.00 on gold describe very different markets and cannot be compared directly. Some traders divide the ATR by price to express it as a percentage, which makes comparisons across instruments easier.
How Traders Use the ATR
The ATR is a supporting tool. It adds a volatility dimension to decisions that are made using other analysis.
Volatility-based stop-losses
A fixed stop of 20 pips may be too tight in a volatile market and too loose in a quiet one. Some traders set stops as a multiple of the ATR instead, such as 1.5 × ATR from the entry. With an ATR of 50 pips, that stop would be 75 pips away. With an ATR of 20 pips, it would be 30 pips away.
The idea is that the stop distance adjusts to current conditions. It does not remove the possibility of loss, and stop orders can still fill beyond their level during gaps. Terms such as slippage and gaps are defined in CMS Prime’s glossary.
Position sizing
If stops are wider in volatile markets, position size can be reduced so that the potential loss in account currency stays similar. For example, a trader who limits each trade to a fixed amount would trade a smaller size when the ATR-based stop is 75 pips than when it is 30 pips. Account conditions for each account type are listed on CMS Prime’s account comparison page.
Trailing stops
A trailing stop can be set a fixed ATR multiple below the highest price since entry, and moved up as price rises. This is sometimes called a “chandelier” approach, because the stop hangs from the high.
Filtering conditions
Some traders avoid very low ATR conditions, where price barely moves, or very high ones, where spreads and slippage can increase. Others watch for a low ATR followed by a sharp rise, which can accompany a breakout. CMS Prime’s breakout trading strategy guide looks at how breakouts are defined.
Setting realistic targets
A short-term trader targeting 80 pips in a session when the daily ATR is 50 pips is expecting an unusually large move. Comparing targets with the ATR puts expectations in context, which is especially relevant for short-term styles, as covered in day trading vs swing trading.
Adding the ATR on MT4 and MT5
On both platforms, the ATR is found under Insert → Indicators → Oscillators → Average True Range. The default period is 14, and it can be changed in the settings window. The indicator opens in a separate sub-window beneath the price chart.
Changing the timeframe changes the reading. A 14-period ATR on a 1-hour chart measures average hourly ranges, while on a daily chart it measures average daily ranges. CMS Prime’s guide to multiple timeframe analysis explains how traders combine timeframes.
Limitations and Risks of the ATR
The ATR is widely used, but it has clear limits.
- No direction. The ATR rises in strong rallies and in sharp sell-offs alike.
- Backward-looking. It is built from past ranges, so it reacts after volatility changes. A sudden news spike can exceed the recent ATR many times over.
- Absolute values. Readings depend on price level, instrument and timeframe, which complicates comparisons.
- Event risk. Central bank decisions and major data releases can produce ranges far outside recent norms. The CMS Prime economic calendar lists these events.
- Leverage. A volatility-adjusted stop does not change the fundamental risk of a leveraged position. Losses can be larger than expected, particularly during gaps.
Frequently Asked Questions
What does the ATR indicator tell you? The ATR tells you how much price has moved on average per period over a recent window, usually 14 periods. It measures volatility in price units, such as pips or dollars. It does not show trend direction or predict whether price will rise or fall.
What is a good ATR value? There is no universal good or bad ATR value. Readings depend on the instrument, its price and the timeframe. Traders usually compare the current ATR with its own recent history to judge whether volatility is high or low for that market.
Why does the ATR use the true range instead of high minus low? The true range includes the gap between the previous close and the current period’s high or low. This captures moves that happen between sessions, such as weekend gaps. A simple high–low range would understate volatility when gaps occur.
What is the default ATR period? The standard setting is 14 periods, as introduced by Wilder. Shorter periods react faster to changes in volatility but are noisier. Longer periods are smoother but slower. The period can be changed in the indicator settings on MT4 and MT5.
How is the ATR used for stop-loss placement? Some traders place stops at a multiple of the ATR, such as 1.5 or 2 times the current reading, away from the entry. This widens stops in volatile markets and tightens them in quiet ones. Stops can still fill at worse levels during gaps or fast markets.
Does a high ATR mean a trend is strong? Not necessarily. A high ATR means ranges are wide, which can happen in strong trends, sharp reversals or choppy, news-driven markets. Trend strength is usually judged with other tools, such as market structure or moving averages.
Conclusion
The ATR indicator measures how far price typically moves each period, turning volatility into a single number. Built from the true range and usually averaged over 14 periods, it helps traders size stops and positions to match current conditions and set realistic expectations for targets. It does not indicate direction, it reacts after volatility changes, and it cannot anticipate sudden news-driven spikes. The ATR is available on CMS Prime’s MT4 and MT5 platforms for anyone studying how volatility shifts across instruments and timeframes.
Risk warning: Trading in financial instruments such as Forex, CFDs, and derivatives involves a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results.
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