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Trading glossary

Average True Range (ATR)

By the PatternX team · Published

Definition

Average True Range (ATR) is a volatility indicator that averages true range over a set number of periods, usually 14. True range is the largest of a bar's high-low range and the distances from its high and low to the previous close.

How it's measured

J. Welles Wilder Jr. introduced ATR to capture volatility including gaps. First, each bar's true range (TR) is the largest of three values:

  1. High minus low.
  2. The distance between the high and the previous close.
  3. The distance between the low and the previous close.

ATR is then the average of TR over n bars, usually 14. Wilder's original smoothing is:

Some platforms use a simple average of the last n true ranges instead; the results are close but not identical. Because ATR is in price units, it is often expressed as a share of price so instruments can be compared:

ATR measures how much price moves, not which way.

Why it matters

ATR helps you fit stops and position sizes to the market's actual movement. A stop tighter than normal bar-to-bar noise is likely to be hit by randomness, while a stop one and a half to two ATRs from entry leaves room for ordinary fluctuation. Dividing a fixed amount of money at risk by that stop distance then sets the position size, so volatile markets get smaller positions.

Example

For example, suppose a stock ends a day at $50.00. The next day it opens at $51.50, trades between $51.00 and $52.20, and finishes at $51.80. Its high-low range is only $1.20, but its true range is $2.20, from the previous $50.00 close to the $52.20 high. If the 14-day ATR is $1.60, ATR% is about 3.1% of the $51.80 price, and a 2-ATR stop would sit $3.20 from entry.

Common mistakes

  • Reading ATR as direction. A rising ATR means larger moves, up or down.
  • Comparing raw ATR across symbols. A $2 ATR is large for a $20 stock and small for a $500 one; use ATR%.
  • Forgetting the lag. ATR reflects the last n bars and can understate volatility right after a sudden change.

How PatternX uses it

PatternX works with ATR as a percentage of price. A universal filter drops any setup with ATR% below 0.05, screening out nearly motionless markets. In the PatternX Score, volatility carries 5% of the weight and scores highest when ATR% sits between 0.2% and 2%. PatternX AI's volatility-regime factor uses ATR(14) as a percentage of price and scores highest around 1% (see the AI context layer). Elite plans add an optional ATR band filter, off by default, in the risk controls.

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