Average True Range
ATR · module 23 of 33 · volatility
Average candle range including gaps — the single most useful input to stop placement and sizing.
- Close − 1.5 × ATR (stop guide)
- ATR
ATR measures typical candle range. It sizes stops — our signals use 1.5 × ATR risk and 3.5 × ATR reward.
How to apply it
- 1. Add it. Start with 14 on 1m/5m (Scalping).
- 2. Read the market first. Rising ATR means stops must be wider and positions correspondingly smaller for the same risk.
- 3. Adjust for ranges. Falling ATR means tight ranges; the same pip stop is now a much larger multiple of normal movement.
- 4. Manage the trade. Place the stop at 1.5 × ATR and the target at 3.5 × ATR, and only act when the chart above shows the trigger.
How it is calculated
TR = max(H−L, |H−Cprev|, |L−Cprev|); ATR = smoothed average of TR over n.
Inputs
- · Period (14)
Reading it correctly
In a trend
Rising ATR means stops must be wider and positions correspondingly smaller for the same risk.
In a range
Falling ATR means tight ranges; the same pip stop is now a much larger multiple of normal movement.
Settings by style
| Style | Suggested values |
|---|---|
| Scalping | 14 on 1m/5m |
| Intraday | 14 on 15m |
| Swing | 14 on 4h/1D |
These are conventional starting points, not optimised values. Test any change on your own pair and timeframe before relying on it.
Worked example
ATR(14) on 4h EUR/USD is 0.0032 (32 pips). A 1.5 ATR stop is 48 pips. With A$10,000 equity at 1% risk (A$100) and A$1 per pip per 0.1 lot, position size = 100 ÷ (48 × 1) ≈ 0.21 lots. If ATR doubles, the same risk buys half the position.
When it failed
A fixed 20-pip stop was used across all sessions. In the London open ATR was 45 pips, so the stop sat well inside normal noise and was hit on 80% of trades regardless of direction.
Limitations
- Says nothing about direction.
- Backward-looking; a volatility expansion appears only after it begins.
- A single gap or spike inflates it for the whole lookback.
Works well alongside
- · Every strategy — use it for stops and sizing
- · ADX / DMI
Redundant with
- · Standard deviation
- · Bollinger BandWidth
- · Chaikin Volatility
Stacking these produces agreement by construction, which is not confirmation.
Practice exercise
Record ATR(14) on 15m EUR/USD at the start of each session for two weeks. Compare Asian, London and New York averages, then set session-specific stop multiples.
Check your understanding
1. ATR's primary practical use is:
- · Predicting direction
- ✓ Scaling stops and position sizes to current volatility
- · Identifying overbought conditions
- · Measuring volume
It converts a risk budget into a stop distance and therefore a position size appropriate to current conditions.
2. If ATR doubles and your risk percentage is unchanged, position size should:
- · Double
- ✓ Halve
- · Stay the same
- · Increase slightly
A doubled stop distance with the same cash risk requires half the position size.