Definition

The Average True Range (ATR) is a technical indicator that measures market volatility. It's essentially a simple moving average of the True Range (TR), which itself is the greatest of three values: the current high minus the current low, the absolute value of the current high minus the previous close, or the absolute value of the current low minus the previous close.

The ATR provides a numerical value that represents the average volatility over a specific period of time.

Suggested Trading Use

Traders often use the ATR to assess the potential risk associated with a trade. A higher ATR value typically indicates increased volatility, which could mean higher potential for price swings. Conversely, a lower ATR value suggests lower market volatility, pointing to smaller price movements.

The ATR can also be useful for determining stop-loss and take-profit levels. For instance, a trader might set a stop-loss a multiple of the ATR away from their entry price, allowing for market volatility while protecting against significant loss.

Additionally, the ATR can help traders decide on suitable position sizes. A more volatile market, represented by a high ATR, might warrant smaller position sizes to manage risk, whereas a less volatile market, indicated by a low ATR, could allow for larger positions.