What ATR is

Average True Range. For each bar, the true range is the largest of: this bar's high minus low, the distance from the previous close to this high, or the distance from the previous close to this low. Including the previous close is what makes it "true" — it captures gaps. ATR is then a smoothed average of that, usually over 14 bars.

The result is a single number: how much this market typically moves per bar, in price units. On a daily chart with ATR of 120 points, the instrument normally travels about 120 points a day.

Unlike everything else here, ATR is a measurement, not an opinion

RSI and MACD tell you about direction and thrust, and reasonable people read them differently. ATR tells you the average bar size. There is no bullish or bearish ATR — it is not a directional tool at all, and it never will be. That is exactly why it is so useful: it is the one indicator in this course that gives you a number you can use directly in a calculation.

Stop placement

The standard use: place your stop a multiple of ATR away from entry rather than at a round number you invented. A stop 2×ATR below entry on a daily chart is outside one day's ordinary range; 1×ATR is inside it and will be hit by noise.

This fixes a specific, very common beginner error — using the same point stop distance on every market. Thirty points is enormous on a quiet pair and trivial on a volatile one. ATR-scaled stops adapt to the instrument and, importantly, to changing conditions: when volatility expands, your stop automatically widens because it should.

Position sizing

The same number sets your size. If your stop is 2×ATR away and you know how much you are willing to lose, then:

stop distance in points = 2 × ATR
loss per lot at that stop = stop distance × value per point × lots
so lots = (amount you will risk) / (stop distance × value per point)

This is the calculation that turns "I will risk 1% of my account" into an actual position. Without a volatility-based stop distance, that sentence is not computable.

ATR expands when you least want it to

One caveat worth knowing: ATR rises in crises, so ATR-based stops widen exactly when your position is under the most stress. This is correct behaviour — a fixed narrow stop in a volatility spike just guarantees you get stopped out at the worst price — but it means you must size off the current ATR, not the ATR from when you entered, or you will be carrying more risk than you think.

Reference page: /indicators/atr.

How to check this yourself

Read today's ATR(14) on your market and write the number down. Now count how many of the last twenty bars had a range larger than that number — it should be roughly a third to a half. Then take your usual stop distance and express it as a multiple of ATR. If the answer is under 1, your stop is inside ordinary noise and you are being stopped out by nothing.