Field Guide to Trading Terms

Atr indicator

Family VI · Charts & indicators

Not to be confused with adx indicator, cci indicator, volume indicator.

ATR indicator stands for Average True Range. It quantifies the degree of price movement over a given period, providing a numerical value that reflects volatility rather than direction. Traders use it to gauge market activity and adjust strategies accordingly.

Calculation and Interpretation

The ATR is computed by first determining the true range for each period, which is the greatest of: the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. These true range values are then averaged over a chosen number of periods, often using a moving average. A higher ATR indicates greater volatility, while a lower ATR suggests reduced volatility. The ATR does not indicate price direction; it only measures the magnitude of price movement.

Worked Example

Suppose a stock has the following daily data over three periods:

ATR Calculation (3-period)
Day 1High=50, Low=45, Prev Close=48TR = max(5, |50-48|=2, |45-48|=3) = 5
Day 2High=52, Low=48, Prev Close=50TR = max(4, |52-50|=2, |48-50|=2) = 4
Day 3High=51, Low=47, Prev Close=52TR = max(4, |51-52|=1, |47-52|=5) = 5
ATR(5+4+5)/34.67

Usage and Limitations

The ATR is commonly used to set stop-loss levels, position sizing, and identify potential breakouts. For example, a trader might place a stop-loss at a multiple of the ATR below the entry price. However, the ATR is not a directional indicator and should be used in conjunction with other tools. Its value is sensitive to the chosen period; shorter periods react faster to volatility changes, while longer periods are smoother.

Often confused with

adx indicator
The ADX indicator measures trend strength, not volatility, and its values range from 0 to 100, whereas the ATR has no upper bound and reflects price range magnitude; the ADX line rising above 25 signals a strong trend, while the ATR simply rises with larger price swings.
cci indicator
The CCI indicator is an oscillator that measures price deviation from its average and can signal overbought or oversold conditions, while the ATR quantifies volatility without directional bias; the CCI oscillates around zero with typical bounds of ±100, whereas the ATR is always positive and unbounded.
volume indicator
The volume indicator measures the number of shares or contracts traded, reflecting market participation, whereas the ATR measures price volatility; volume is a raw count that can spike on news, while the ATR is a derived average of price ranges.

See also

Family: VI · Charts & indicators · Index A–Z