Average True Range

What is Average True Range in forex and CFD trading

The Average True Range (ATR) is a technical analysis indicator that measures market volatility by calculating the smoothed average of the true range over a specified period, typically 14 periods. The Average True Range matters for real trading decisions because it provides an objective, quantifiable measure of an instrument’s normal price movement, which is essential for setting rational stop-loss orders, take-profit targets, and adjusting position sizing to control risk. A trader verifies the Average True Range by adding the indicator to their chart and observing the ATR value; the value is expressed in pips or points, providing a concrete measure of current volatility (see our forex glossary for more).

Key facts about Average True Range

• Classification: A volatility indicator, not a directional indicator; it only measures movement magnitude, not trend direction.
• Calculation Basis: Based on the True Range (TR), which is the greatest of three calculations: High minus Low, Absolute value of High minus Previous Close, or Absolute value of Low minus Previous Close.
• Default Period: The standard lookback period for the Average True Range is 14 periods.
• Unit of Measure: The Average True Range is denominated in the same units as the price, typically pips for forex or points for indices, such as an ATR of 0.0050 on EUR/USD, which is 50 pips.
• Application: Primarily used for position sizing and setting stop-loss and take-profit levels dynamically, not for generating entry signals.
• High ATR: Indicates high market volatility, suggesting the price is making large moves per period.
• Low ATR: Indicates low market volatility, suggesting the price is moving in a tight range.

How Average True Range works in forex and CFD trading

The Average True Range (ATR) works by first determining the True Range of an instrument for the current period, incorporating any gaps from the prior period’s close, and then calculating the Exponential Moving Average of those True Range values to smooth the result.

Calculation follows these steps:

1. Calculate the True Range (TRₜ): For the current period t, the True Range is the greatest value among these three options:

   TRₜ = max[(Highₜ – Lowₜ), |Highₜ – Closeₜ₋₁|, |Lowₜ – Closeₜ₋₁|]

2. Calculate the Initial ATR: For the first 14 periods, the initial ATR is the Simple Moving Average of the first 14 True Range values.
3. Calculate Subsequent ATR: For all periods thereafter, the ATR is smoothed using a modified Exponential Moving Average (EMA) method:

   ATRₜ = [(ATRₜ₋₁ × (N-1)) + TRₜ] / N

   Where N is the Average True Range period (e.g., 14).

4. Risk Setting: A trader uses the resulting ATR value (e.g., 1.5 times the ATR) to set a stop-loss distance that is proportional to current market volatility.

Example of Average True Range with a real trade

This example demonstrates using the Average True Range to determine a risk-appropriate stop-loss distance for a trade on EUR/USD.

Trade Risk Calculation:

Result: $160.00 defined risk. The Average True Range provided an objective, volatility-adjusted stop-loss distance, ensuring the stop is wide enough to avoid normal market noise.

How Average True Range affects your cost and risk

The Average True Range directly impacts risk by informing stop-loss placement and position sizing, indirectly affecting cost only through reduced unnecessary trade executions caused by noise.

Average True Range compared with related concepts

Average True Range vs Standard Deviation

The Average True Range is an arithmetic measure of market volatility, expressed in price units (pips/points), which specifically includes price gaps between periods by calculating the True Range. Standard Deviation is a statistical measure of volatility that measures how widely price data is dispersed from its mean (a moving average), expressed in relative terms, and it does not explicitly account for gaps between periods. The Average True Range is more intuitive for stop-loss placement, whereas Standard Deviation is better for statistical analysis of price dispersion.

Average True Range vs Volatility Index (VIX)

The Average True Range measures the historical, realized volatility of a single asset (e.g., EUR/USD) and is denominated in that asset’s price units. The Volatility Index (VIX) is a forward-looking measure of the market’s expected volatility over the next 30 days, derived from S&P 500 index option prices, and is scaled as a percentage. The Average True Range is used for trade management on a specific chart, while the VIX is used for macroeconomic risk assessment.

How Afterprime handles Average True Range

Afterprime ensures that the Average True Range calculated on its platforms is highly reliable because the indicator is based on raw, unfiltered price data from institutional liquidity providers. The sub-50 millisecond execution speed is particularly relevant when traders use the ATR to calculate tight stop-loss levels (e.g., 1.5 × ATR); fast execution minimizes the slippage risk that could push the executed stop-loss beyond the calculated ATR threshold. For EUR/USD, the typical ATR value displayed reflects the true interbank volatility without artificial smoothing or manipulation. The combination of institutional-grade price feeds and zero commission means traders can implement ATR-based risk management strategies without fixed costs compounding the effective stop-loss distance.

Broker differences in Average True Range across the industry

Differences in the Average True Range across brokers stem from the market model, specifically how price feed filters and liquidity aggregation affect the True Range input.

How to verify Average True Range on your trading platform

Verifying and using the Average True Range (ATR) involves applying the indicator and checking its output units.

1. Open Indicator List: In MetaTrader 4 (MT4) or MetaTrader 5 (MT5), navigate to ‘Insert’ > ‘Indicators’ > ‘Oscillators’.
2. Select ATR: Choose the ‘Average True Range’ indicator and open its settings.
3. Set Period: Set the ‘Period’ to the standard 14 for general volatility measurement.
4. Confirm Price: Ensure the ATR is applied to the ‘Close’ price or remains as default, as it uses high/low/close data points.
5. Check Display: Verify the ATR is displayed in a separate pane below the price chart, oscillating around a base value.
6. Read Value: Hover the cursor over the ATR line to read the current value (e.g., 0.00080).
7. Convert to Pips: Convert the displayed value to pips for easy risk calculation (e.g., 0.00080 equals 8 pips for a 4-decimal forex pair).
8. Sanity check: The ATR value must always be a positive number and should fluctuate, rising during major news events and falling during Asian session flatness.