Average True Range (ATR)
By Menno van Ravels - 13 years in crypto, 3 bear markets survived, zero paid promotions
AI Quick Summary: Average True Range (ATR) Summary
Term
Average True Range (ATR)
Category
Trading
Definition
Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a specified period, accounting for gaps.
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Average True Range (ATR) is a volatility indicator that measures the average range of price movement over a specified period, accounting for gaps. Traders use ATR to set dynamic stop losses, determine position sizes, and assess whether current volatility is above or below normal levels for an asset.
Developed by J. Welles Wilder in 1978, ATR calculates the true range for each period — the greatest of: current high minus current low, absolute value of current high minus previous close, or absolute value of current low minus previous close — then averages these values over a specified period (typically 14). ATR does not indicate direction, only the magnitude of price movement.
ATR is primarily used for three purposes: setting stop losses (e.g., placing stops 1.5–2x ATR away from entry), sizing positions (risking a fixed dollar amount divided by ATR-based stop distance), and filtering for volatility conditions. A rising ATR indicates increasing volatility, while a falling ATR indicates compression that often precedes a breakout.
According to Van Tharp's research in "Trade Your Way to Financial Freedom," using ATR-based stops instead of fixed percentage stops improved risk-adjusted returns by approximately 15–25% across multiple asset classes in a 20-year backtest. The ATR-based approach adapts to each asset's volatility characteristics, setting wider stops for volatile assets and tighter stops for stable ones.
In crypto, ATR values are significantly higher than traditional markets due to greater volatility. Bitcoin's 14-day ATR on the daily chart typically ranges from 2–5% of price during calm periods to 8–15% during high-volatility events. Altcoins can show ATR values of 10–30% or more. This makes ATR-based position sizing essential for avoiding oversized exposure during volatile conditions.
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Frequently Asked Questions
How do you use ATR to set a stop loss?
Multiply the current ATR by a factor (commonly 1.5–2.0) and subtract from your entry price for longs, or add for shorts. For example, if you enter a long at $50,000 and the 14-day ATR is $2,000, a 2x ATR stop would be at $46,000. This adapts your stop to the asset's actual volatility rather than using an arbitrary percentage.
What is a good ATR setting for crypto?
The standard 14-period ATR works well for most timeframes. Day traders sometimes use 7-period ATR for faster responsiveness. For position sizing, the daily 14-period ATR is the most common choice. Compare the current ATR to its 20-period average to assess whether volatility is expanding or contracting.
Related Tools on Alpha Factory
Related Terms
Volatility
Volatility measures how much an asset's price fluctuates over time. Crypto is significantly more volatile than traditional assets — Bitcoin's annualized volatility typically ranges from 45-65% compared to 15-20% for the S&P 500 — meaning larger potential gains but also substantially larger potential losses.
Stop Loss
A stop loss is a pre-set order that automatically sells (or closes) a position when price reaches a specified level, limiting the maximum loss on a trade. Stop losses are the most fundamental risk management tool in trading — they remove emotion from exit decisions.
Risk Per Trade
Risk per trade is the maximum amount of capital a trader is willing to lose on a single trade, typically expressed as a percentage of total account equity. Professional traders commonly risk 0.5–2% per trade, ensuring that no single loss can significantly damage their account or trigger emotional decision-making.
Trailing Stop
A trailing stop is a dynamic stop loss that automatically moves with price in your favor by a fixed amount (percentage or absolute value), locking in profits as the trade moves favorably while still allowing the trade to run. If price reverses by the trailing amount from its highest point, the stop triggers.
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