ATR (Average True Range) explained

Volatility

The full guide, with worked examples and what our tests found: MACD Crossover Studies

What ATR measures

ATR measures market volatility by calculating the average of true ranges over a lookback period. The true range is the greatest of: current high minus current low, absolute current high minus previous close, or absolute current low minus previous close. ATR doesn't indicate direction — it measures HOW MUCH an asset typically moves per period, invaluable for setting stops and targets.

How ATR readings are interpreted

A rising ATR means volatility is increasing (market is moving more). A falling ATR means volatility is decreasing (market is quieting down). ATR is expressed in price units, so $2.50 ATR on a $100 stock means ~2.5% daily range. It's most useful for position sizing and stop-loss placement.

Conventional ATR levels

Rising ATR: increasing volatility, which conventionally implies wider stop distances and smaller position sizes
Falling ATR: decreasing volatility — potential for a breakout building
ATR compared to historical levels: high = unusual volatility, low = compression
1× ATR stop: tight, suitable for day trading
2× ATR stop: standard for swing trading
3× ATR stop: wide, for position trading

Where ATR works, and where it does not

ATR is market-regime agnostic — it works in all conditions as a risk management tool. Very low ATR readings often precede significant breakouts (the 'volatility compression before expansion' pattern). ATR tends to spike during market panics and earnings events.

Indicators commonly read alongside ATR

Supertrend uses ATR internally for its dynamic stop level
GU Bands: built on ATR-based Fibonacci levels
Position sizing: use ATR to ensure equal risk per trade regardless of asset price
Bollinger Bands: BB Width and ATR together show volatility from different angles

Known limitations of ATR

ATR alone tells you nothing about direction — it is conventionally paired with a directional indicator
In gapping markets (overnight gaps), ATR can be temporarily distorted
Comparing ATR across different-priced assets is meaningless — use NATR (normalised) for comparison

ATR in practice

ATR is conventionally used to scale stop distances — commonly 1.5 to 2× ATR from the reference level
Reward-to-risk ratios of 2:1 or 3:1 are often expressed in ATR multiples rather than fixed percentages
A drop to a multi-month ATR low is widely read as compression that frequently precedes a larger move
Position sizing is commonly reduced when ATR sits above its 20-period average, since the same stop distance then represents more risk

Other volatility indicators

Bollinger Bands
Bollinger Band Width
Normalized ATR
Keltner Channel

On the test bench

A Stronger Benchmark for the MACD Crossover
Study 002 compared MACD crossovers with every trading day. A reader asked if that was fair, so we re-ran the test only against days with similar trend and volatility, with a calendar-block bootstrap interval on each crossover-minus-comparison difference.

MACD Crossover Studies
A series of event studies on the MACD signal-line crossover in US large-cap stocks: what follows a crossover, whether the benchmark it is measured against is fair, and whether the size of the crossover carries information of its own.

Testing ideas built on ATR

A reading of ATR can be written as an exact rule and checked against historical data — as a full strategy with entries, exits and costs, or as a single condition and what followed it:

How to backtest a trading strategy without code
Event analysis: what follows a market event

Plot it yourself. Add this indicator to a chart, change every parameter and watch the line move, then backtest how the rule would have behaved on historical data — free on the S&P 500 ETF, no card.

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This is reference material, not advice. It describes what each indicator measures and how its readings are conventionally interpreted. Nothing here is a recommendation to buy or sell anything, and no indicator predicts future prices. GU Analyser is an analytical tool — no money is ever traded here.