ATR explained: Average True Range as a volatility gauge

The Average True Range (ATR) tells you how much an instrument typically moves per candle. It does not tell you which way it will move: ATR is a ruler, not a compass.

Where ATR comes from: the true range

J. Welles Wilder introduced ATR in 1978 for commodity markets, where prices often jumped between sessions. A plain high-minus-low range misses those jumps, so he defined the true range of a candle as the largest of three numbers:

1. Current high minus current low.
2. The absolute distance from the previous close to the current high.
3. The absolute distance from the previous close to the current low.

If the market opens where it closed, the first number usually wins. If it opens far away, one of the other two catches the jump. See the glossary entry on true range for a compact definition.

From true range to ATR

ATR is a smoothed average of true ranges, by default over 14 periods. Wilder used his own smoothing: the new ATR equals the previous ATR times 13, plus the latest true range, all divided by 14. It behaves like a slow exponential average, so a single wild candle nudges ATR up rather than making it spike.

ATR is expressed in price units. On EUR/USD an ATR of 0.00040 means about 4 pips per candle; on USD/JPY an ATR of 0.040 also means about 4 pips, because the pip sits in a different decimal place. Because it is an absolute number, ATR on its own cannot be compared across instruments with very different prices.

A worked example

Suppose you look at EUR/USD on the M5 chart. The last three candles look like this (illustrative numbers):

In candle 3 the high-low range is 0.00080, but the previous close (1.08550) sits above the high, so the distance from that close to the low (0.00100) is the true range. If ATR(14) was 0.00050 before candle 3, the new value is (0.00050 × 13 + 0.00100) / 14 ≈ 0.00054. Volatility ticked up, and that is all the reading says. Candle 3 was bearish, but ATR would have risen by exactly the same amount if it had been bullish.

ATR is direction-agnostic

Rising ATR during a sell-off and rising ATR during a rally look identical. A common beginner mistake is to treat a jump in ATR as a "signal to enter". It is not. It means candles are getting bigger, which can happen at the start of a trend, at the climax of one, or during a messy news spike that goes nowhere.

Falling ATR means quieter candles. That often happens in ranges and before scheduled news, but quiet periods can also end in either direction. Pair ATR with something that does describe direction, such as moving averages or market structure, if you want a directional view at all.

Comparing instruments and timeframes

To compare volatility between instruments, divide ATR by price. An ATR of 0.00054 on a price of 1.0850 is about 0.05% per candle. If GBP/JPY shows 0.09% on the same timeframe, it is moving almost twice as much in relative terms.

To compare timeframes, keep in mind that ranges do not grow in proportion to time. In a roughly random market, typical movement grows with about the square root of time: four times longer gives roughly twice the movement, not four times. So if the M1 ATR is 2 pips, the M5 ATR is often somewhere near 4–5 pips rather than 10. Treat this as a rule of thumb, not a law; trending sessions break it.

What ATR means for short expiries

A higher/lower trade pays the same whether price finishes one pip or fifty pips in your direction, so ATR does not change the payout. It changes the picture of how far price usually wanders during your expiry.

• When ATR is tiny, a 30-second trade is close to a coin flip around the entry price, and ties become more common.
• When ATR suddenly doubles around news, a level that looked far away can be crossed in seconds in either direction.
• Matching expiry to ATR helps you avoid one specific error: choosing an expiry so short that your analysis has no room to play out. The article on choosing an expiry time goes further.

On Sky Trade's OTC instruments, ATR measures the volatility of prices generated by Sky Trade's server. Those prices do not track any real market, the model's next move is unpredictable by design, and volatility drifts slowly over time. ATR will faithfully show quiet and lively phases there, but it carries no directional information at all.

How to use it in the Sky Trade terminal

Add ATR from the indicators list (it sits among the oscillators) and keep the default 14. Switching the chart timeframe, for example from M1 to M5, is a quick way to see how typical movement scales before you pick an expiry.

False readings and limits

ATR spikes on one-off events and then decays, so it can describe the past hour better than the next minute. It cannot tell a healthy trend from chaotic two-way swings. Use it to size expectations, not to make decisions on its own. Remember also that with payouts below 100%, you need to win more than half of your trades just to break even, so a volatility reading that does not improve your direction calls does not improve your results.