The true range of a candle is the largest of three values: high − low, the distance from the previous close to the high, and the distance from the previous close to the low. ATR averages the true range over a period, typically 14 candles. It says nothing about direction; it only measures how much price moves. A rising ATR means volatility is expanding.
Example
BTC's 14-day ATR is $2,400. A swing trader using a 1.5× ATR stop places it $3,600 from entry. With a $10,000 account and 1% risk ($100), the position size is $100 ÷ $3,600 ≈ 0.028 BTC. A month later ATR has dropped to $1,200, the stop distance becomes $1,800, and the same $100 risk allows about 0.056 BTC.
Why it matters
Stops placed inside normal volatility get hit by noise. ATR helps keep stops outside the typical range and adjusts position size automatically: smaller in wild markets and larger in calm ones, with the same dollar risk.
Common mistake
Using the same fixed-dollar or fixed-percentage stop in every market condition. A 1% stop may be fine in a quiet week and far too tight after a volatility spike. Check ATR again before each trade.
Put it into practice
FAQ
- What ATR multiple should I use for stops?
- Common choices are 1 to 3 times ATR, depending on the timeframe and strategy. Test which multiple keeps you out of noise without making the risk-reward unworkable.
- Does ATR show the trend direction?
- No. It only measures the size of moves. A strong downtrend and a strong uptrend can have the same ATR.
- Which ATR period is best?
- 14 is the default. Shorter periods react faster to changes in volatility; longer ones give a smoother reading.