TRADING GLOSSARY

ATR (Average True Range): measuring market volatility

The Average True Range (ATR) is a technical indicator that measures market volatility by calculating the average range between the high and low prices over a specified period, typically 14 periods. It does not indicate price direction — only how much an asset typically moves.

How ATR is calculated

The True Range for each period is the greatest of: current high minus current low, absolute value of current high minus previous close, or absolute value of current low minus previous close. The ATR is then the moving average of these True Range values over 14 periods.

Using ATR in trading

Stop loss placement: Many professional traders set their stop loss at 1.5x to 2x ATR from their entry price. This gives the trade enough room to breathe through normal volatility while still limiting risk. If ATR is $2 and you use a 2x ATR stop, your stop is $4 away from entry.

Position sizing: Higher ATR means more volatile price swings. To maintain consistent risk, you should trade smaller positions when ATR is high and larger positions when ATR is low. The formula: Position Size = (Account Risk) / (ATR multiplier × ATR).

Volatility assessment: Rising ATR indicates increasing volatility (often seen at trend changes or during news events). Declining ATR indicates decreasing volatility (often seen during consolidation before breakouts).

AskTrade’s Risk Assessment Agent uses ATR as a core input for calculating optimal stop loss distances and position sizes.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

Experience Multi-Agent Research

12 AI agents collaborate to deliver institutional-quality analysis. Try it from $2.

Start Trading →

AskTrade analyses are AI-generated and do not constitute financial advice.