Average True Range

The Average True Range distills each bar's movement into a single volatility reading: the true range — the largest of the high-low span and the two distances from the prior close — averaged over a lookback. Measuring from the prior close captures gap moves a bare high-minus-low span would ignore — Wilder's reason for defining it this way. The build plots the classic 14-period ATR with a smoothing selector — Wilder's RMA default, plus SMA, EMA, and WMA — the standard, unaltered calculation.

How to Trade the Average True Range?

• Rising ATR: ranges are expanding — moves travel farther, stops need more room, and position sizes should shrink to keep risk constant.
• Falling ATR: contraction — tighter stops become viable, and compressed readings are where breakout traders start paying attention.
• Stops in ATR multiples: an ATR-sized buffer past entry or structure adapts the exit to current conditions instead of a fixed tick count.
• Sizing by ATR: dividing the account risk per trade by an ATR-based stop distance normalizes exposure across instruments and regimes.
• ATR spikes: sudden jumps mark event-driven volatility, after which recent readings — not older ones — define what a normal distance means.

ATR is direction-blind and denominated in price units: a waterfall decline expands it just as a powerful advance does; a reading only means something against the instrument's recent history.

Average True Range Settings

• Length (default 14): the number of bars averaged. Shorter lengths track regime shifts quickly but jump around; longer lengths give a stabler baseline for stops and sizing.
• Smoothing (default RMA): the moving average applied to the true range. RMA is Wilder's original smoothing and produces the classic ATR; SMA weighs all bars equally; EMA and WMA lean toward recent bars and react faster.

Frequently Asked Questions

Why use true range instead of the simple high-low range?

Gaps. When a bar opens far beyond the prior close, its high-low span understates what a position endured overnight; true range reaches back to the prior close, folding that jump into the estimate.

Which smoothing option should I choose?

RMA is the faithful default, and most published ATR-based methods — stop multiples, channel widths, sizing rules — assume it, so keep it when following a standard recipe. EMA or WMA react faster after a volatility event; SMA gives the most literal average of the window.

Can ATR generate buy or sell signals?

Not by itself — it contains no directional information. Its job is context and calibration: stop distances, position sizes, and the width for Keltner-style channels and chandelier-style trailing stops. It is the measuring stick other decisions are built on.