True Range
True Range considers the current high-low range and gaps relative to the previous close. It is designed to capture more of the actual movement between periods than high minus low alone.
Average True Range
ATR smooths True Range over a selected lookback, commonly 14 periods.
A rising ATR indicates that observed price ranges are expanding; a falling ATR indicates ranges are contracting.
ATR does not show direction
ATR can rise during a sharp rally or a sharp decline because both involve larger price movement.
ATR measures volatility. Direction must come from other information.
ATR as a percentage of price
ATR can be normalized by dividing ATR by price and expressing it as a percentage. This makes volatility easier to compare across assets with very different price levels.
ATR and risk management
Traders sometimes use ATR to adapt stops or position sizing to current volatility. This does not mean any fixed ATR multiple is universally optimal.
How True Range handles gaps and large moves
True Range is commonly defined as the greatest of three quantities: the current high minus current low, the absolute current high minus previous close, and the absolute current low minus previous close.
ATR then smooths True Range over a chosen period. Wilder's original formulation uses his smoothing method, although software implementations should always be checked rather than assumed.
Absolute ATR versus normalized ATR
Raw ATR is expressed in the asset's price units. That makes direct comparisons between assets with very different price levels difficult.
Dividing ATR by price and expressing the result as a percentage can provide a normalized volatility measure, but the chosen price reference and implementation should be defined consistently.
ATR changes with volatility regimes
Rising ATR indicates that recent price ranges are expanding; falling ATR indicates that they are contracting. Neither condition identifies whether price should rise or fall.
Volatility can also change abruptly, so an ATR-based stop or position-sizing rule still relies on historical observations rather than knowledge of future movement.
High ATR can occur during rallies, selloffs or violent sideways trading. Use separate evidence when the strategy requires directional information.
Key takeaways
- ATR measures volatility, not direction.
- True Range incorporates gaps relative to the previous close.
- Rising ATR indicates expanding observed movement.
- ATR percentage can make volatility more comparable across differently priced assets.
Sources & further reading
This lesson is educational material. Market structure, exchange rules, fees, margin requirements and derivatives mechanics can differ by venue and can change over time. Verify current rules with the venue you use.