ATR
The average range of a candle. You need it to know what a normal stop is for this instrument.
ATR — what it is?
ATR is the average true range, a measure of volatility. It shows how far an instrument moves on average over a period, gaps included.
It is not a signal indicator: it says nothing about direction. It speaks about the scale of the move, and that is where its value lies.
In practice ATR is needed where markup has to be turned into numbers: how wide a stop has to be so that it does not sit inside ordinary noise.
ATR — how it is built?
It is convenient to set the buffer beyond a zone boundary in ATR rather than in points: then one and the same rule works both on a quiet EUR/USD and on bitcoin. The same ATR tells you whether a target is realistic in terms of distance.
ATR — common mistakes
Expecting entry signals from ATR.
Placing a stop tighter than current volatility: ordinary noise will take it out.
Comparing the ATR of different instruments in absolute numbers instead of as a percentage of price.
Forgetting that volatility changes: parameters tuned in a quiet market will not survive the news.
Related to
Glossary
- volatility
- how far price swings over a period. High volatility means big moves in both directions.
- instrument
- the specific thing being traded: EUR/USD, XAU/USD, BTC/USDT.
- indicator
- a calculation based on price or volume, drawn on the chart.
- Bitcoin
- the first and largest cryptocurrency by capitalisation.