Indicators

What Average True Range (ATR) Is and How to Calculate It

Astron Team · 09/24/2026 · 4 min read

Unlike most indicators, the Average True Range (ATR) doesn't try to predict any direction. It measures a single thing: how much an asset usually moves, in absolute value, within a period. It's a volatility ruler, not a buy or sell signal.

Created by J. Welles Wilder, the same author of the ADX and the RSI, the ATR shows up in almost every strategy that needs to size a stop or a position based on the asset's real behavior, instead of a fixed value chosen arbitrarily.

Why a simple high-minus-low average isn't enough

If you only subtracted the low from the high of each candle, you'd miss an important detail: gaps. Imagine an asset closed the previous session at R$ 50.00 and opened the next session already at R$ 46.00, then trading between R$ 45.50 and R$ 46.80. The change within the candle (high minus low) was only R$ 1.30. But the real move since the previous close was R$ 4.50. Ignoring that underestimates the asset's real volatility.

How to calculate the True Range

To fix this problem, the True Range (TR) of each candle is the largest value among three calculations:

• Current candle's high minus current candle's low;
• Current candle's high minus previous candle's close (absolute value);
• Current candle's low minus previous candle's close (absolute value).

In the example above, the TR would be the largest value among 1.30 (46.80 − 45.50), 3.20 (|46.80 − 50.00|), and 4.50 (|45.50 − 50.00|). So, TR = R$ 4.50 — the number that actually captures the size of the move, including the gap.

From True Range to ATR

The ATR is a smoothed average of the True Range over a period, usually 14 candles. The first value is usually the simple average of the first 14 TRs. After that, Wilder's smoothing is applied:

Today's ATR = ((Previous ATR × 13) + Today's TR) ÷ 14

Suppose yesterday's ATR was R$ 2.00 and today's TR came in at R$ 4.50, following the previous example:

Today's ATR = ((2.00 × 13) + 4.50) ÷ 14 = (26.00 + 4.50) ÷ 14 = 30.50 ÷ 14 ≈ R$ 2.18

Notice how a single strong-move candle doesn't send the ATR spiking all at once — it rises gradually, because it carries the weight of the 13 previous periods. That's intentional: the ATR measures recurring volatility, not an isolated spike.

What it's actually used for

The most common use of the ATR is sizing the stop-loss and position size proportionally to the asset's own behavior, instead of using a fixed number of points or money for any market.

An example: if an asset's ATR is R$ 2.18, a stop-loss placed at 1.5 ATR from the entry would sit R$ 3.27 away from the entry price (2.18 × 1.5). On a more volatile asset, with an ATR of R$ 8.00, the same 1.5 ATR multiple would result in a R$ 12.00 stop — much wider, because that asset itself moves more day to day. Using the same fixed stop distance in both cases would make little sense: on the calmer asset, the stop would be too wide; on the more volatile one, too tight and prone to being hit by simple market noise.

The ATR doesn't say where the price is going

A common mistake is trying to use the ATR as an entry signal — a high ATR doesn't indicate a rally or a decline, just a bigger move. A sharp 10% drop and a sharp 10% rally can generate similar True Range readings, since the calculation uses absolute values. Because of that, the ATR usually shows up alongside another indicator or a trend reading, never alone as a trade trigger.

Bringing the ATR into daily use

The ATR works best as a risk management tool than as an entry signal. It helps answer practical questions: is this stop proportional to the asset's current volatility? Does this position size make sense given how much the price usually swings? Used this way, the indicator reduces the chance of a stop being hit by simple noise common to the asset, although no management technique eliminates risk entirely — it only helps size it more consistently.