Average True Range (ATR)

What is it?‍

The Average True Range (ATR) measures how much an asset’s price moves over a period, giving you a sense of its volatility. Think of it as a gauge of how wild or calm the price swings are.

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‍How is it used?

• Volatility assessment: Higher ATR means more volatility, which can signal breakout opportunities or warn of risky conditions.
• Stop-loss placement: Traders often set stop-losses at 1-2x the ATR below/above entry points to account for normal price swings.
• Position sizing: In algo trading, ATR can adjust position sizes based on volatility—smaller positions for high ATR, larger for low ATR.

How is it calculated?

‍ATR is based on the “true range,” which is the greatest of:

• 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.

The ATR is then the average of the true ranges over a specified period (commonly 14 days):

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TR = Max[(High - Low), |High - Previous Close|, |Low - Previous Close|]  

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ATR = (Previous ATR × (n-1) + Current TR) / n  

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Where n is the period (e.g., 14).

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‍_{The above content is designed for informational purposes only, and is explicitly not investment advice. Algo Pilot is a US based technology company and not a bank, broker-dealer, or RIA. As such, Algo Pilot LLC does not provide investment advice and is not a member, SIPC. Brokerage services offered by 3rd parties are not directly affiliated with Algo Pilot LLC, and Algo Pilot users may choose the broker relationship that they desire.}

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