Average True Range

Average True Range (ATR) is an indicator of market’s volatility. In other words, it helps to determine the average size of the daily trading range. ATR rises when trading is more volatile (price bars are long) and falls during periods of low volatility (price bars are short). Use ATR to determine the best position for Stop orders.

How to interpret:

The higher the value of the indicator is, the higher the probability of a trend’s change is. The lower the indicator’s value is, the weaker the trend’s movement is.

When the market is volatile, one should set wider stops in order to avoid being stopped out of the trading by some random market noise. When the volatility is low, one may set tighter stops. It’s recommended to set stops equal to 2-4 times of ATR value. As for trailing stops, they may be set at the distance of 30%, 50% or more of ATR value. While trading on a breakout of some level, set your entry order by about 20% ATR to reduce the risks of a false breakout.

The indicator can be used as a filter of a trend. To do that, you should use a central line. There is no particular central line for this indicator, so it is estimated by the eye. As an option, you can use a moving average with a big period. When the indicator is below the moving average, the market is calm. When the ATR breaks the moving average, a trend starts.

To confirm the trend, it is worth to implement the indicator on several time frames. If the picture is similar and the ATR broke its moving average on the smaller time frame, the market rallies.

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