Average True Range

Average True Range was developed by J. Welles Wilder and introduced in his 1978 book alongside ADX and the Directional Movement System. ATR quantifies market volatility by calculating how much price typically moves per bar, expressed in the same units as the asset's price. A Bitcoin ATR of 1,500 on the daily chart means the asset is moving an average of 1,500 dollars per day across the lookback period. ATR is calculated by first determining the True Range for each price bar — the largest of three measurements: the current high minus the current low, the absolute difference between the current high and the previous close, or the absolute difference between the current low and the previous close. This three-way comparison ensures that overnight gaps and limit moves are captured in the volatility measurement. The True Range values are then smoothed using Wilder's smoothing method over the default 14-period lookback to produce the ATR line. A key characteristic of ATR is that it is non-directional — it measures the magnitude of price movement without indicating whether that movement is upward or downward. Rising ATR indicates expanding volatility; falling ATR indicates contraction. ATR does not generate buy or sell signals; it is a volatility measurement tool used to calibrate other decisions. The primary practical applications of ATR are stop-loss placement and position sizing. Because ATR reflects actual current price movement magnitude, stops placed at a multiple of ATR — commonly 1.5× or 2× — are calibrated to normal market noise levels rather than arbitrary fixed distances. This prevents stops from being triggered by routine price fluctuations while still limiting downside exposure. ATR-based position sizing adjusts trade size inversely to volatility, ensuring consistent risk exposure across varying market conditions. Signal Thresholds — ATR (Average True Range) Standard period 14 (default). ATR measures volatility, not direction. It is always positive. Low volatility ATR below 1% of price: compressed volatility. In Bitcoin, an ATR below 0.5% of price has historically preceded explosive directional moves. Monitor for Bollinger Squeeze confluence. Normal volatility ATR of 1–3% of price: typical crypto market conditions. High volatility ATR above 3–5% of price: elevated volatility; wider stops required. Reduce position size proportionally to maintain consistent risk per trade. Extreme volatility ATR above 5–7% of price: abnormal volatility — often accompanies significant news events or liquidation cascades. Trend signals are less reliable; execution slippage increases. Stop-loss placement 1.5× ATR below entry: standard stop for trend-following entries. 2× ATR: wider stop for higher-volatility regimes or longer holding periods. 3× ATR: trend-following swing stops that allow for normal retracement. Tighter stops than 1× ATR in crypto will almost always be triggered by normal noise. Position sizing Standard formula: Position size = (Account risk %) ÷ (2× ATR × price). A 1% account risk with 2× ATR stop in BTC at $60,000 with ATR of $1,500: 0.01 ÷ (2 × 1,500 ÷ 60,000) = 0.2 BTC.