ATR indicator: what average true range is and how to read it
By Bec, futures trader and founder of Wildflower · Updated
The ATR (average true range) measures how big recent candles have been, in the same units as price, counting any gap from the close before. A rising ATR means candles have been getting bigger, in either direction. It says nothing about which way price will go.
What the ATR measures, and why it’s called that
Every One bar on a price chart. It shows where price opened and closed, and the highest and lowest it reached, in one stretch of time.More in the glossary has a range: its high minus its low. The ATR averages those ranges over the last few candles, so it tells you how far price has been moving in each candle, in points. That makes it a measure of How much and how quickly price moves. A market that swings a lot is called volatile.More in the glossary.
The word “true” is there because a plain high minus low misses something. If price jumps between one candle’s close and the next candle’s open, that jump is movement too. The The largest of a candle’s high minus its low, its high minus the close before it, and the close before it minus its low. It counts gaps between candles.More in the glossary counts it. “Average” is the smoothing that turns many true ranges into one line.
The ATR has no top or bottom. It’s drawn in its own panel, in the same units as the chart. On a futures chart that’s points, so an ATR of 4 means candles have been moving 4 points each on average, on the How much time each candle covers, such as 1 minute or 1 hour.More in the glossary you’re looking at.
How the ATR is worked out, step by step
1. Measure each candle
High minus low. Here the ATR uses 3 candles, to keep the picture small.
2. Check the close before
Candle 4 opens above 103 and candle 6 opens below 103.5. Measure from those closes too.
3. Keep the largest
Each candle’s true range is the biggest of the three distances.
4. Average them
Average the first three, then Wilder’s smoothing keeps it going.
A candle’s true range is the largest of three distances:
- Its high minus its low.
- Its high minus the close before it (this is the biggest after a gap up).
- The close before it minus its low (this is the biggest after a gap down).
- True ranges: 3, 2, then 4 for candle 4 (107 − 103, not 107 − 105), 4.5, then 5 for candle 6 (103.5 − 98.5, not 101 − 98.5), and 2.5.
- First ATR (candle 4): (3 + 2 + 4) ÷ 3 = 3.
- Then: (3 × 2 + 4.5) ÷ 3 = 3.5. Next, (3.5 × 2 + 5) ÷ 3 = 4. Next, (4 × 2 + 2.5) ÷ 3 = 3.5.
That smoothing, (last ATR × (length − 1) + new true range) ÷ length, is the one J. Welles Wilder used, the same as in his RSI. Some tools use a simple or exponential average instead, so their ATR reads a little differently. The first candle on a chart has no close before it, so some tools use its high minus low and others skip it.
Most charting tools start with a length of 14. That’s a starting point, not a rule. A shorter length reacts faster, and a longer one is smoother. The length is your choice.
Why the true range counts gaps
In the last two pictures, the second candle only moves 2 points from its high to its low. But price really travelled 4 points from the close before, because it jumped between candles. The true range counts that jump, so a gap can’t hide movement from the ATR.
Futures pause for a short break each day and close for the weekend, so gaps often show up at the first candle after a pause. On a short timeframe in a busy market, each candle often opens right next to the last close, so the true range is often just the high minus the low.
How to read the ATR
Rising ATR. Candles, or the gaps between them, have been getting bigger. Falling ATR. They’ve been getting smaller.
No direction. The true range only measures size. The two pictures above are the same candles, one turned upside down. One falls and one rises, and the ATR is exactly the same line. A high ATR doesn’t mean price is falling or rising, only that it’s moving a lot.
It lags. Wilder’s average changes slowly. In the picture at the top, the candles get small again straight after the fall, but the ATR takes many candles to drift back down. It’s a An indicator built from past prices, so it changes after price has already moved.More in the glossary: it describes the recent past.
Points, not percent. An ATR of 3 means 3 points. That’s a lot on a market trading at 100, and very little on one trading at 5,000, so ATRs on different markets can’t be compared directly.
It changes with the timeframe. A 1-hour candle covers more movement than a 5-minute one, so its ATR is bigger. Always read it with its timeframe.
What the length changes
A 5-candle ATR jumps in a fast move and drops soon after. A 14-candle ATR moves more slowly and stays higher for longer. Neither is right or wrong: one describes the last few candles, the other a longer stretch.
How traders use the ATR
The ATR doesn’t give signals on its own. Traders use it as a ruler that grows and shrinks with the market. A few ways you’ll see it used:
- Stop distances. Some traders place a An order that closes a trade if price reaches a level you set against it. It aims to limit the loss, but in a fast market it can fill at a worse price.More in the glossary a number of ATRs from their entry, so it sits further away when candles are big. The number is their own choice.
- Trade size. A wider stop in points means more risk per contract, so some traders trade fewer contracts when the ATR is high.
- A filter. Some only look for setups when the ATR is above (or below) a level they choose.
- Distance moves. Some mark a starting price, such as the session’s open, and watch for price to travel a set number of ATRs away from it.
An ATR distance: what counts, and what doesn’t
Here the start is a candle’s open, 5,000.25. The ATR on the candle before was 1.35, so two ATRs is 2.70, and the line sits at 4,997.55.
Past the line counts. In the first picture, the low trades beyond it.
Nearly isn’t enough. In the second, price stops 0.2 short. It hasn’t travelled the distance.
Wick or close is your rule. In the third, the low goes past but the candle closes back above. If your rule says “trades past”, it counts. If it says “closes past”, it doesn’t.
Which ATR value. The ATR changes with every candle. Here the distance uses the ATR from the candle before the start and stays fixed. Your own rule decides which value to use.
Where the ATR comes from
J. Welles Wilder Jr. introduced the average true range in his 1978 book New Concepts in Technical Trading Systems, the same book that introduced the RSI. He built it for commodity futures, where overnight gaps and daily price limits happened often and a plain high minus low missed too much. It’s now on almost every charting platform. Read about the RSI.
Often confused with
A candle’s range. One candle’s high minus low. The ATR is an average of many, and it counts gaps.
Standard deviation and Bollinger Bands. They also measure how much price moves, but from closing prices only, spread around an average. The ATR uses highs, lows and gaps. Read about Bollinger Bands.
Keltner Channels. Lines a number of ATRs above and below a moving average. They’re built from the ATR, but they’re a different indicator. Read about Keltner Channels.
SuperTrend. A line that sits a number of ATRs from price and only moves towards it. Also built on the ATR. Read about SuperTrend.
ADX. Another Wilder indicator, which measures how strong a trend is. It uses the true range inside its sums, but it’s a different reading. Read about ADX.
Using the ATR in an indicator for TradingView
Add an ATR condition to your own setup
Wildflower’s Indicator marks setups on a chart from rules you describe in plain words, with every number typed by you. It can use the ATR as a condition on a setup, like “only mark it when the ATR is above a number of ticks I type”. You choose its length and timeframe. Marking a move of a set number of ATRs from a starting price isn’t one of its building blocks, and it tells you plainly if you ask for it. Check everything it builds on a chart for free, then add it to TradingView with a step-by-step guide.
Try it free. You only pay when you add it to TradingView.
Common questions
What does ATR stand for?
Average true range.
What does the ATR tell you?
How big recent candles have been, counting gaps, in the same units as price. It measures how much price moves, not which way.
Does a high ATR mean price will go up?
No. The ATR has no direction. It rises in a fast fall just as it does in a fast climb.
What is a good ATR setting?
There isn’t one right setting. Most charting tools start at 14 candles, but the length is your choice.
How is true range calculated?
The largest of: high minus low, high minus the close before, and the close before minus low. See the worked example.
Is ATR in points or percent?
Points, or whatever units the chart’s price uses. To compare markets, some traders divide it by price.
Why is my ATR different from another chart’s?
Check the length, the timeframe and the smoothing. Some tools use a simple or exponential average instead of Wilder’s.
What is an ATR stop?
A stop placed a number of ATRs from the entry, so its distance changes with how much the market is moving. The number is the trader’s choice.
Who invented the ATR?
J. Welles Wilder Jr., in his 1978 book New Concepts in Technical Trading Systems.