Average True Range is a volatility indicator calculated from each bar’s true range: the greatest of high minus low, absolute high minus previous close, and absolute low minus previous close. It measures movement size, not direction or a guaranteed future range.
Example. With previous close 1.1000, high 1.1030 and low 1.1010, the three distances are 20, 30 and 10 pips. True range is therefore 30 pips. The gap component matters even though the bar’s own high-low range is only 20 pips.
Period and smoothing
A 14-period ATR on a daily chart uses daily bars; on an hourly chart it uses hourly bars. Wilder-style smoothing updates as ((previous ATR × 13) + current true range) ÷ 14 after initialization. Confirm the platform’s smoothing method.
Position sizing example
Suppose ATR is 40 pips and a tested rule uses a 1.5× distance: 60 pips. With an illustrative USD 30 cash budget and USD 10 per pip per standard EUR/USD lot, the size is 30 ÷ (60 × 10) = 0.05 lot before costs. The multiplier is an example, not a recommendation.
Likewise, an hourly ATR of 0.0012 on EUR/USD represents 12 pips, so 1.5 × ATR is 18 pips. A EUR 100 risk budget in an EUR account requires converting pip value into EUR; USD 10 per pip per lot cannot be entered as EUR 10. The illustrative multiplier still needs to be evaluated as part of the full rule.
Common mistake
ATR is not a maximum daily move or a probability band. A market can move beyond an ATR-based stop. A larger ATR does not by itself indicate a breakout direction, prove momentum or say that the day’s range is exhausted.
Should a stop always be placed at 1.5 or 2 times ATR?
No universal multiplier suits every strategy. Test the entry, intended holding period, costs and position size together. Price can move beyond an ATR-based stop, and execution is not guaranteed at the trigger.
Does a rising ATR show the direction of price?
No. ATR measures the size of movement rather than its direction. Larger ranges can occur during advances, declines or unstable sideways trading.
Can true range exceed the bar’s high–low range?
Yes. True range also compares the current high and low with the previous close, so a gap can make it larger than the current bar’s own range.
Does ATR-based position sizing guarantee constant risk?
It can normalise planned risk under stated assumptions. Gaps, slippage, costs and changing conditions can still make the realised loss differ from the model.
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