Average True Range (ATR) is a technical indicator developed by J. Welles Wilder that measures market volatility. It calculates the average of a market's "true range" over a specified number of periods — typically 14. ATR tells you how much a market typically moves, which makes it one of the most practical tools for stop loss placement.

True Range vs ATR

The True Range for a single period is the largest of:

  • High − Low (the day's range)
  • |High − Previous close| (gap up situation)
  • |Low − Previous close| (gap down situation)

ATR is the 14-period moving average of the True Range values. It smooths out individual spiky sessions to give a representative measure of typical volatility.

Using ATR for Stop Losses

The standard ATR stop approach: place your stop loss at (1.5× to 2×) ATR beyond your entry. If EUR/USD has a 14-period ATR of 70 pips and you buy at 1.0850, a 2× ATR stop sits at 1.0850 − 0.0140 = 1.0710. This stop accounts for the typical daily range and won't be triggered by normal market noise.

Fixed pip stops ignore current volatility — the same 30-pip stop that works in a calm market will be hit constantly in a volatile one. ATR stops automatically adapt: they widen when markets are moving more and tighten when conditions are calm.

ATR as a Market Condition Filter

Rising ATR signals increasing volatility — often seen during news events, trend beginnings, or reversals. Falling ATR signals a consolidating, directionless market. Some traders avoid certain setups when ATR is below a threshold (too quiet, setups don't follow through) or above one (too volatile, stops get blown past entry levels).