The average true range indicator (ATR) measures how far a market typically moves over a chosen number of bars. It says nothing about direction. It gives you scale: how much room a stop needs, and how large a position can be for the same loss in pounds.
Quick answer: what does the average true range indicator do?
ATR averages the true range of recent bars, usually 14, to show how much a market normally moves. Traders use it to judge whether a stop sits inside ordinary noise, to add a buffer beyond a swing point, and to shrink position size when volatility rises so the risk per trade stays fixed.
What the average true range indicator measures
J. Welles Wilder introduced ATR in 1978, alongside RSI. It starts from the true range of each bar, which is the largest of three distances: the high minus the low, the high minus the previous close, and the previous close minus the low. Using the previous close means a gap counts as movement.
Our overview of the best technical indicators for beginners introduces ATR in a few lines. Here we go further, into the calculation, stops and sizing.
A true range calculation with a gap
Example, hypothetical figures: an index closes at 7,950. The next day it opens higher and trades between 7,980 and 8,010. The high minus the low is only 30 points, but the high minus the previous close is 60 points, so the true range is 60.
The standard ATR then smooths these values. Wilder’s method takes the previous ATR, multiplies it by 13, adds the new true range and divides by 14. If the previous ATR was 46, the new reading is (46 x 13 + 60) / 14 = 658 / 14 = 47 points.
How to read ATR on your chart
ATR is shown in the market’s own units: points on an index, pips on a currency pair, dollars on gold. A rising line means bars are getting larger; a falling line means the market is quietening. Neither tells you direction.
- Timeframe matters: a daily ATR and a 15-minute ATR on the same market can differ many times over. Use the timeframe your stop actually lives on.
- Compare markets as a share of price: an ATR of 80 on an index at 8,000 is 1% of price, while 70 pips on EUR/USD at 1.1000 is about 0.64%. Raw numbers in different units are not comparable.
- Expect jumps around news: scheduled releases can lift ATR for days, so check an economic calendar before sizing a trade.
Using ATR for stop loss placement
We do not place a stop at “entry minus two ATR” and call it done. The stop belongs where the trade idea is proven wrong, usually beyond a swing low or high, as set out in our guide on where to place a stop loss with price action. ATR is the second layer.
We use it in two ways. First, as a buffer: the stop goes a fraction of ATR beyond the swing point, so ordinary noise and the spread do not trip it. Second, as a sanity check: if the structural stop is less than about half a daily ATR away, it probably sits inside normal movement and is likely to be hit for no real reason.
A buffer also keeps the stop clear of round numbers; see why stops cluster at obvious levels.
Choosing an ATR multiple
There is no correct multiple. Each one trades stake size against how often normal movement reaches the stop, and the right choice depends on the market, the timeframe and your method.
| Stop distance | Effect on stake | Main drawback |
|---|---|---|
| Under 0.5 x ATR | Largest stake | Often inside normal noise |
| 1 x ATR | Large stake | Hit by an ordinary day’s move |
| 1.5 to 2 x ATR | Moderate stake | Target must be further away |
| 3 x ATR or more | Small stake | Few trades reach a sensible reward |
ATR position sizing across markets
Once the stop distance is set, the stake follows from the money you are willing to lose. The formula is risk in pounds divided by stop distance, explained step by step in our guide on how to calculate position size for CFDs and spread bets. ATR’s job is to make that stop distance realistic for current conditions.
The result is that a volatile market gets a smaller stake and a quiet one a larger stake, while the loss at the stop stays the same. How much to put at risk in the first place is a separate decision, covered in how much to risk per trade.
Worked example: one risk budget, two markets
This example is hypothetical. On an £8,000 account we risk 1% per trade, which is £80. We look at a long trade on an index and one on EUR/USD, both spread bets.
- Index: entry 8,300, swing low 8,250, daily ATR 80 points. A buffer of 0.25 x ATR is 20 points, so the stop is 8,230, 70 points away. Stake: £80 / 70 = about £1.14 a point.
- EUR/USD: entry 1.1000, swing low 1.0955, daily ATR 60 pips. A buffer of 0.25 x ATR is 15 pips, so the stop is 1.0940, 60 pips away. Stake: £80 / 60 = about £1.33 a pip.
- Volatility doubles: a week later the index ATR is 160. The next setup’s swing low is 110 points below entry and the buffer is 40, so the stop is 150 points away. Stake: £80 / 150 = about £0.53 a point.
Had we kept the old £1.14 stake on that 150-point stop, the loss at the stop would be about £171, more than double the plan. Spread bets and CFDs are leveraged, and a gap can still fill beyond the stop. The FCA’s permanent rules on CFDs for retail clients limit leverage to between 30:1 and 2:1 and require positions to be closed when funds fall to 50% of the margin needed, so a wide stop with an unchanged stake can also strain your margin.
ATR for trailing stops and targets
Some traders trail a stop a fixed multiple of ATR behind the highest high since entry, so it loosens in volatile spells and tightens in calm ones. We prefer trailing behind new swing points, as in our trailing stop loss strategy for price action traders, and use ATR only to check the trail is not sitting inside normal noise. Bands set a multiple of ATR either side of an average form a Keltner channel; see our Keltner channel strategy.
For targets, ATR shows what is realistic: if a market moves around 60 pips a day, a 300-pip target on a day trade is a long shot. Our guide on setting profit targets and exit rules covers using levels first.
Common mistakes with ATR
- Treating ATR as direction: it rises in rallies and sell-offs alike.
- Ignoring structure: an ATR stop placed in the middle of a range protects nothing in particular.
- Using the wrong timeframe: a 5-minute ATR under a daily swing trade gives a stop far too tight.
- Keeping the stake when ATR expands: a wider stop needs a smaller position, every time.
Frequently asked questions
What is a good ATR setting?
Fourteen periods is Wilder’s original setting and the default on most platforms. Shorter settings react faster but are noisier.
Is 1.5 or 2 x ATR better for a stop?
Neither is better in general. Test the multiple on your own market, timeframe and setups, and always check where it lands against the swing point that defines the trade.
Does ATR work on forex, indices and crypto?
Yes, because it only measures movement in the market’s own units. Compare markets as a share of price, not by raw ATR.
Can ATR tell me when to enter?
Not on its own. It describes how much a market is moving, so we use it for stop distance and size, and take entries from price action at key levels.
Next steps
ATR is one input into a wider risk plan; see our guide to building a rules-based risk model for how stops, size and total exposure fit together.
Building a rules-based risk model and assessing whether a trade is worth the risk are both part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
