The Average True Range (ATR), another J. Welles Wilder Jr. indicator, measures how much an instrument typically moves per bar. It says nothing about direction — only about volatility — which makes it one of the most practical tools for risk management.
How ATR is calculated
The true range for each bar is the largest of:
- Current high − current low
- |Current high − previous close|
- |Current low − previous close|
ATR is the average of the true range over 14 periods by default.
Using ATR for stops
A stop that is too tight gets hit by normal noise; a stop that is too wide wastes risk. An ATR-based stop adapts to current conditions:
Stop distance = ATR × multiple
If EUR/USD’s 1-hour ATR is 12 pips and you use 1.5×, your stop is 18 pips. When volatility doubles, the stop widens automatically.
Using ATR for position sizing
Since the stop changes with volatility, your position size must too. Feed the ATR-based stop into the position size calculator and your risk stays constant whether the market is quiet or wild. This is especially important for gold and index futures, where volatility shifts dramatically around news.
Other uses
- Targets: project 2–3× ATR as a realistic profit target.
- Filters: skip breakout trades when ATR is unusually low, or avoid entries when ATR spikes after news.
- Trailing stops: a “chandelier” stop trails a multiple of ATR below the highest high.
A worked true-range calculation
Gold closed yesterday at $2,400. Today’s high is $2,412 and today’s low is $2,398.
- High − low = $14
- |High − previous close| = $12
- |Low − previous close| = $2
The true range is the largest: $14. The 14-period ATR averages these values across the last 14 bars.
Sizing from an ATR stop: two examples
Gold (XAU/USD). The 1-hour ATR is $6.00. With a 1.5× multiple the stop is $9.00. One standard lot is 100 ounces, so the stop costs $900 per lot. Risking 1% of $10,000 ($100) gives 0.11 lots ($99).
Micro E-mini S&P (MES). The 5-minute ATR is 4 points. A 2× stop is 8 points — $400 per ES contract or $40 per MES ($5 per point). Risking $250 allows six MES ($240). Use the futures calculator for any contract.
ATR multiples by trading style
| Style | Chart | Typical stop |
|---|---|---|
| Scalping | 1–5 minute | 1–1.5× ATR |
| Day trading | 5–15 minute | 1.5–2× ATR |
| Swing trading | Daily | 2–3× ATR |
| Position trading | Daily/weekly | 3× ATR or more |
The chandelier exit
A chandelier stop trails below the highest high since entry:
Stop = highest high − (ATR × 3)
If the highest high since entry is 5,500 and the daily ATR is 20 points, the stop is 5,500 − 60 = 5,440. As new highs form, the stop rises; it never moves down.
Common mistakes
- Using a fixed lot size while the stop changes with ATR — risk then swings with volatility.
- Reading ATR as direction. A rising ATR can mean a strong rally or a crash.
- Ignoring the timeframe. A daily ATR stop on a 5-minute entry is far too wide; match the ATR to the chart you trade.
Frequently asked questions
What is a good ATR multiple for stop losses?
Many traders place stops 1.5 to 3 times ATR from entry. Tighter multiples suit intraday trading; wider multiples suit swing trading.
Does ATR show trend direction?
No. ATR measures only how much price moves, not which way.
What is the best ATR period?
14 is the standard and works for most traders. Shorter periods such as 5 or 7 react faster to volatility changes; longer periods such as 20 or 50 give a steadier reading for swing trading.
Is ATR measured in pips or dollars?
ATR is measured in the instrument's own price units: pips for forex pairs, dollars for gold and stocks, points for index futures. Multiply by the value per unit to convert it to dollars per contract or lot.
Can ATR be used to set profit targets?
Yes. Many traders aim for 1.5 to 3 times ATR as a realistic target, because it reflects how far the market typically moves over the holding period.