Measure volatility and size your stops intelligently.
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Overview
The Average True Range (ATR), developed by J. Welles Wilder Jr. in his 1978 book, measures market volatility by calculating the average of the "true range" over a specified period. The true range is the greatest of: (current high − current low), (|current high − previous close|), and (|current low − previous close|), ensuring gaps are captured.
ATR does not indicate direction — it measures only the magnitude of price movement. A high ATR indicates a volatile market; a low ATR indicates a calm one. This makes it invaluable for stop-loss calibration: a 2× ATR stop, for example, is set far enough away to avoid being triggered by normal market noise, yet close enough to limit losses meaningfully.
The Chandelier Exit is a popular trailing stop technique based on ATR: the stop trails at 3× ATR below the highest high reached during the trade. As the trade becomes profitable and price climbs, the stop rises with it, protecting profits while allowing the trend to breathe.
ATR is also used in position sizing: many systematic traders risk a fixed fraction of equity per trade and set position size = Risk Amount ÷ (ATR × multiplier), ensuring every trade represents an equal real-money risk regardless of the asset's absolute price.
Strategy Code
This is a TradingView Pine Script example for this indicator. Paste it into the TradingView Pine Editor, add it to your chart, and adjust inputs for your market and timeframe.
//@version=6
strategy("Average True Range (ATR)", overlay=true)
atrLen = input.int(14, "ATR Length")
atrMult = input.float(2.0, "ATR Mult")
emaLen = input.int(50, "Trend EMA")This is a thinkorswim ThinkScript example for this indicator. Open thinkorswim, create a custom study, paste the script, and apply it to your chart.
input atrLength = 14;
input emaLength = 50;
def atrVal = ATR(atrLength);
def emaVal = ExpAverage(close, emaLength);
def buySignal = close crosses above emaVal;Join thousands of traders who use auto-Trading to execute this strategy automatically, 24/7.
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