The ATR (Average True Range, volatility indicator), invented by J. Welles Wilder in 1978, measures the average amplitude of candles over the last N periods (typically 14).
For each candle, the "True Range" (TR) is the max of:
- Candle high - candle low
- |High - previous close|
- |Low - previous close|
ATR is then the moving average (often exponential) of TRs over N periods. Result is expressed in the same unit as price (USD, EUR, pips).
Practical uses (most powerful):
- Adaptive stop-loss: place the stop at 1.5× or 2× ATR below entry for a long. This respects the asset's current volatility (volatile Bitcoin will have a much wider stop than calm EUR/USD)
- Position sizing: if capital = $10,000, risk = 1% = $100. ATR(14) = $200 on Bitcoin. Stop at 2× ATR = $400. Max position size = $100 / $400 = 0.25 BTC. Same rule applies uniformly across all asset classes.
- Take-profit projection: 3× ATR to target a minimum 1:1.5 R:R
- Market filter: only trade when ATR is above the 6-month average (avoid rangelets without volatility)
ATR is an indicator of absolute volatility, not direction. It won't tell you if it's going up or down, just how much it's moving. Combined with a trend indicator (MACD, EMA), it becomes the backbone of pro money management.