ATR explained: Average True Range volatility measurement

By Ken Chigbo, Founder, KenMacro. Published 2026-05-12.

What is ATR?

ATR is a volatility indicator that measures the average price range of an asset over a lookback period, typically 14 bars. True range for each bar is the maximum of three values: current bar high minus current bar low, current bar high minus prior bar close, and prior bar close minus current bar low. The third element captures opening gaps. ATR is the smoothed average of true range, plotted as a line on most charting platforms. ATR is quoted in the price units of the underlying asset (pips for FX, dollars for indices and stocks, cents for some commodities), which makes it directly usable for sizing decisions.

How traders use ATR

Traders use ATR primarily for position sizing and stop placement, not for directional signals. A stop placed at 2 times daily ATR below entry on a long position adapts naturally to the asset's current volatility regime: tighter stops in quiet conditions, wider stops in volatile conditions. Position sizing follows the same logic: position size equals risk-per-trade divided by ATR-based stop distance. The desk's deployed frameworks use ATR for stop placement and sizing across XAUUSD, USDJPY, and indices. A second ATR use is regime classification: ATR rising rapidly across multiple assets signals broader volatility expansion (often risk-off); ATR contracting signals compression (often preceding expansion). The desk's Volatility Contraction Continuation framework uses ATR contraction as a primary entry filter.

Worked example with ATR

Consider a EUR/USD swing trader with a 10,000 US dollar account, a 1 per cent risk-per-trade cap (100 US dollars), entering long at 1.0850. Daily ATR on EUR/USD reads 75 pips. The trader sets the stop at 2 times ATR below the position, so 1.0850 minus 150 pips equals 1.0700. The 150-pip stop at one-dollar-per-pip per micro lot of EUR/USD means position size equals risk cap divided by stop in pips divided by pip value per micro lot, or 100 divided by 150 divided by 0.10, equal to 6.67 micro lots, rounded to 6 micro lots (0.6 mini lots) for conservative sizing. The same trader on a higher-ATR regime (ATR at 120 pips) would place the stop at 240 pips and size at 4 micro lots, with the same dollar risk.

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Frequently asked

What are the standard ATR settings?

The standard ATR setting is 14 periods, as specified by J. Welles Wilder in 1978. Variations include 7-period (faster, more reactive) and 20-period (smoother, more stable) settings. The standard 14-period ATR remains the most widely used across charting platforms and is the default in TradingView, MetaTrader, and NinjaTrader.

How do I use ATR for position sizing?

Position size equals risk-per-trade divided by ATR-based stop distance divided by pip value per micro lot. For example, a 100 US dollar risk cap, a 2-times-ATR stop on a 75-pip daily ATR (150 pips), at 10 cents per pip per micro lot, gives 6.67 micro lots, rounded to 6 micro lots for conservative sizing. Position size adjusts with ATR to keep dollar risk constant.

Is ATR better than Bollinger Bands?

ATR and Bollinger Bands measure different aspects of volatility. ATR measures average price range in absolute units (pips, dollars), ideal for sizing and stops. Bollinger Bands measure standard deviation around a moving average, ideal for compression and expansion detection. Both are widely used; many traders run them side by side as complementary volatility reads.

Educational analysis only. Past performance does not guarantee future results. Manage risk against your own portfolio.