The average true range (ATR) indicator is a tool used to measure market volatility.
The ATR shows how much the price moves during a given period compared to the previous one. It is utilized in trend-following strategies to assess the likelihood of a trend reversal and to determine when the price will break out of a consolidation phase. Moreover, this tool is employed to set stop-loss and take-profit orders and to evaluate the width of the price range in channel trading strategies.
The ATR is a standard indicator available on most trading platforms. It is typically used alongside Price Action analysis and oscillators as a supplementary tool.
The article covers the following subjects:
Major Takeaways
- The ATR is a volatility indicator developed by Welles Wilder.
- The indicator gauges the intensity of price movement but does not determine the trend direction.
- A rising ATR value indicates increased volatility, while a falling value suggests its decline.
- The ATR is used to place stop-loss and take-profit orders, as well as to assess market activity.
- The standard ATR period is 14 candlesticks.
- To improve the accuracy, it is advisable to use the ATR in combination with other technical analysis tools.
What the ATR Indicator Shows and How It Works
The ATR helps identify potential trend reversals. In general, when the indicator moves more than 75% of its average range over a specified period, the likelihood of a reversal increases. Unlike traditional oscillators, however, the ATR does not have fixed boundaries, such as 0 and 100, that define overbought and oversold conditions. Therefore, the ATR is not considered a classic oscillator.
The ATR indicator was introduced by Welles Wilder in 1978 in his book New Concepts in Technical Trading Systems. Wilder also developed several other widely used technical analysis tools, including the Relative Strength Index (RSI) and the Parabolic SAR.
The ATR is designed to measure market volatility, or the extent of price fluctuations over a given period.
This indicator is rarely used as a standalone tool in manual trading. However, it is widely employed in the risk management systems of automated trading advisors. Since the ATR measures market volatility rather than trend direction, it cannot be used to assess trend strength or predict future price movements. Instead, its primary purpose is to indicate the current level of market volatility.
Although its applications are relatively limited, the ATR remains an important tool for setting profit targets, placing stop-loss orders, and assessing the width of price channels. It is widely used in channel and range-bound trading strategies, including channel breakouts and mean-reversion setups.
The indicator’s main signal is straightforward: an increase in the ATR value indicates rising volatility in the asset.
A common misconception is that a rising ATR signals an upward price move. In reality, the indicator says nothing about market direction. When the ATR rises, prices may move either higher or lower. It simply indicates that volatility is increasing and price swings are widening.
What Is the Average True Range?
The ATR measures changes in market volatility over a specified period. To calculate it, the indicator compares:
- the high and low of the current candlestick;
- the current candlestick’s high and low with the previous candlestick’s closing price.
The largest of these values is then selected, and the final figure is averaged over the chosen period.
A relatively low indicator value may point to the following market conditions:
- Flat market. The price moves within a single range, and the average difference between the highs and lows remains relatively stable.
- Weak trend. The price rises or falls gradually, while the range of fluctuations between adjacent candlesticks remains small.
The key signal is a sharp increase in the ATR value. This suggests that volatility is picking up, with prices moving over a wider range than in previous periods. As a result, candlesticks become larger, and market activity becomes more pronounced.
At the same time, the overall price range may remain unchanged. Higher volatility simply means that the market covers the same distance in less time.
ATR Indicator Formula
The calculation of the Average True Range (ATR) is based on three values:
- The difference between the current high and low: High − Low
- The absolute difference between the current high and the previous close: |High − Close₋₁|
- The absolute difference between the current low and the previous close: |Low − Close₋₁|
The largest of these values is selected as the True Range (TR), which serves as the basis for calculating the ATR.
The ATR formula:
ATR = Moving Average (TR, m),
where:
- TR = True Range, the largest of the three values listed above;
- m = averaging period;
- Moving Average = moving average calculated from the True Range values.
ATR Indicator Signals
The ATR measures changes in market volatility. A higher ATR value indicates stronger price activity and larger market swings. However, it does not show the market’s direction and only reflects the magnitude of price movements.
- Section 1. Low and stable ATR values indicate a calm market with limited price fluctuations.
- Section 2. A surge in the ATR signals increasing volatility and stronger price movement.
- Section 3. High ATR values suggest elevated market activity. However, the indicator does not show the direction of the trend.
- Section 4. A declining ATR reflects decreasing volatility, a slowing trend, or the market entering a consolidation phase.
Since the ATR only gauges price volatility, it should be used in combination with other technical analysis tools.
The ATR Indicator in MetaTrader 4
The ATR is a standard technical indicator available on both the MetaTrader 4 and MetaTrader 5 trading platforms. It can be found in the menu under Indicators → Oscillators.
ATR Settings for MT4
The key parameter of the ATR indicator is the calculation period. In the settings, you can also add upper and lower levels, which can be used to visually compare current volatility with previous periods.
Instead of memorizing ATR values, you can add levels and use the chart history to quickly assess how the current volatility compares with previous periods.
In the Levels tab, you can set a fixed value that will appear on the chart as a horizontal line, such as the red line shown in the screenshot below.
In MetaTrader 4, only the current ATR value is displayed in the indicator window. This value does not change as you move the cursor across the chart. To see the ATR reading at a specific point, hover over the indicator and wait for the tooltip to appear, or open the Data Window with the Ctrl+D shortcut.
In the Visualization tab, you can choose the time frames on which the indicator will be displayed. For example, if you analyze multiple time frames but only need the ATR on the daily chart, select D1. The indicator will then be hidden on all other time frames.
You can find various ATR-based indicators online. For example, the MQL5 website offers the ATR Ratio indicator, which displays the ratio between fast and slow ATR values. Once installed, the indicator becomes available in the trading platform.
How to Use the ATR Indicator
The ATR can be used for the following purposes:
- Setting stop-loss orders. The ATR value helps estimate the average price movement range. The boundaries of this range can serve as a reference when placing protective orders.
- Identifying flat markets. If the ATR remains relatively low compared to its average level over previous periods, it may indicate sideways price movement.
- Assessing potential trend exhaustion. The further the price moves beyond its average range, the higher the likelihood of a slowdown or reversal in the current trend.
- Identifying periods of high volatility. A steep rise in the ATR often accompanies strong price moves and can be used in short-term strategies, including Forex scalping.
Setting Stop-Loss orders
Stop-loss orders are typically placed near swing highs and lows. The main goal is to identify significant price extremes and avoid having the order triggered by market noise.
Here’s one way to set stop orders using the ATR:
- Identify support and resistance levels based on the most pronounced swing highs and lows on a relatively low time frame (M5–M15).
- Calculate a distance equal to 2 × ATR and add it to the most recent swing high or subtract it from the most recent swing low.
- Place the stop-loss order at the resulting price level.
The ATR multiplier should be selected individually for each instrument. As a general guideline, a value of at least 1.5 is recommended. For H1 and higher time frames, a multiplier of 3 is commonly used.
An alternative method is to place the stop-loss 1.5–3 ATR away from the entry price. For long trades, the ATR-based distance is subtracted from the entry price, while for short positions, it is added. Traders may also include a small buffer of a few pips to account for market noise. The take-profit level can then be determined using the ATR value from a higher time frame.
This method works best on lower time frames, where market noise is more pronounced. The ATR indicator allows traders to place stop-loss orders at a sufficient distance from the current price, leaving room for short-term market fluctuations.
In the example, the price breaks above a descending resistance line during a downtrend. After the breakout is confirmed by a corresponding pattern and the price rebounds from the breakout area, a long position is opened.
The stop-loss is calculated from the most recent swing low of 1.19588. With the ATR at 0.0005 (5 pips), a distance of 2 × ATR is subtracted from the swing low, resulting in a stop-loss level of 1.19488.
As shown in the chart, the price never reached this mark. After testing the 1.19516 level, it reversed and continued moving higher.
Identifying Flat Markets
Suppose you are trading a currency pair in a trend with an average daily volatility of 80 pips, which can be measured using volatility calculators. If current volatility falls below 50% of the average daily range, the market may be considered sideways. For example, if the indicator remains below 40 pips, trend-following strategies become less attractive because the likelihood of a sustained directional move decreases.
The effectiveness of this approach is not universally accepted. The 50% threshold is not a fixed rule and often needs to be adjusted to suit the specific characteristics of each instrument. Moreover, a market that is moving sideways on a higher time frame can still exhibit a well-defined trend on lower time frames.
One of the main drawbacks of the ATR is the lag inherent in indicators based on moving averages. The longer the calculation period, the less responsive the indicator becomes to recent market activity. For example, with a period of 50, the ATR is calculated using data from the previous 50 candlesticks. As a result, a sudden surge in volatility over the last few candlesticks has only a limited effect on the indicator, as it is diluted by data from earlier periods.
At the same time, an excessively short period makes the indicator overly sensitive and can lead to numerous false signals.
According to the Forex volatility calculator, the average weekly volatility of the EUR/USD currency pair was 44.25 pips as of this writing.
On the daily chart, the current ATR value is 61 pips. Current volatility exceeds the weekly average, which may indicate the absence of a sideways market and stronger trading activity compared to the previous week.
However, ATR alone cannot confirm whether a trend is present or gaining momentum, as the indicator measures volatility rather than the direction of price movement.
Identifying Potential Reversal Points
The greater the deviation of the ATR from its previous levels, the higher the probability that the current market trend is nearing its end.
The relatively low ATR value on the daily chart above does not provide a clear indication of whether a trend is developing. While the market is moving higher, the price action is not strong enough to cause a significant increase in the Average True Range, suggesting relatively low market activity.
Sudden growth in the indicator value signals heightened volatility, meaning price swings become more dramatic. However, traders must assess the market bias using other indicators.
When the ATR peaks and begins to decline, it signals that volatility is easing. During periods of elevated volatility, the market may change direction, as the ATR does not indicate whether prices are moving up or down. As the indicator returns to lower levels, it may suggest that market activity is slowing, with price action entering a consolidation phase or developing into a weak trend.
Another approach to identifying potential reversal points involves comparing the Average True Range with the distance the price has moved since the beginning of the period. This analysis is typically conducted on lower time frames.
Example: Determine the ATR value on the hourly chart and treat it as 100% of the average hourly price range. Then switch to the one-minute time frame, identify the start of the current hour, and measure how much of that range the price has already covered:
- If the price has covered more than 70% of the range, the current move may be losing momentum, making countertrend signals worth considering.
- If the price has covered less than 30% of the range, trades in the direction of the current move may still be considered.
- If the price has covered between 30% and 70% of the range, it is generally advisable to wait for additional confirmation before entering a trade.
The percentages mentioned are approximate and are determined separately for each asset.
ATR Trading Strategies
The ATR is most commonly used as a supplementary tool for assessing volatility and managing risk. One common approach involves using the indicator in conjunction with support and resistance levels.
The trader determines the overall trend direction on a higher time frame and then evaluates current market volatility using the ATR indicator. If the price has covered only a small part of its average daily range, a trade in the direction of the trend can be opened. However, if the price has already moved most of its typical daily range, the chances of the trend extending further may be lower.
The higher the ATR compared to its previous readings, the greater the market volatility. A sharp increase in the ATR may signal stronger price momentum and rising market activity.
However, the ATR is not intended as a standalone trend reversal indicator. Its signals are more reliable when used alongside other technical analysis methods.
Downsides of the ATR
The main drawbacks of the Average True Range include:
- Limited functionality. The ATR measures volatility but does not indicate price direction or predict future market movements. It shows how current volatility compares with previous periods.
- Lagging signals. As an averaging-based indicator, the ATR responds to market changes with a delay. Volatility may start increasing before the indicator reflects it, sometimes by one or two candlesticks.
Despite these drawbacks, the ATR remains a useful tool for analyzing market activity and controlling risk. It is advisable to use the ATR in conjunction with other tools, such as oscillators like the Stochastic and MACD, to enhance the quality of your analysis.
Additionally, using excessively short calculation periods is not recommended, as they can increase the number of false signals. On the hourly time frame, periods between 12 and 14 are commonly used.
Conclusion
The ATR is a valuable tool for gauging market volatility and mitigating risk. While it may be less informative than some other indicators for novice traders, understanding how it works can be helpful when developing and refining a trading system.
If you want to try trading with the ATR indicator, there is no need to install it separately. The indicator is included by default in both MetaTrader 4 and MetaTrader 5, making it easy to explore its features on a demo account. In the rare event that ATR is missing from the platform, you can usually restore it by reinstalling the terminal or copying the indicator file from the MQL/Indicators folder on another computer. The ATR is also built into the LiteFinance trading platform, so it is ready to use without any additional installation.
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