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Volatility Indicators

ATR - Average True Range

Learn ATR for volatility measurement, stop loss calculation, and position sizing. Essential for risk management.

What is ATR?

The Average True Range (ATR) was developed by J. Welles Wilder in 1978. Unlike most indicators, ATR doesn't indicate direction - it measures volatility, showing how much an asset typically moves.

ATR answers the question: "How much does this instrument move on average?" This is crucial for setting appropriate stop losses and position sizes.

True Range Calculation:

True Range = MAX of:
  1. Current High - Current Low
  2. |Current High - Previous Close|
  3. |Current Low - Previous Close|

ATR = 14-period average of True Range

The formula accounts for gaps by including the previous close, ensuring ATR captures the full volatility including overnight gaps.

Primary Uses of ATR

Stop Loss

Set stops based on actual volatility, not arbitrary pips

Position Sizing

Adjust lot size based on current volatility

Trailing Stops

Dynamic stops that adapt to volatility

Volatility Filter

Avoid trading in low/high volatility conditions

How to Use ATR

Stop Loss Calculation

Instead of using fixed pip stops (which don't adapt to market conditions), use ATR multiples:

Stop Loss Example

Current ATR (14): 50 pips

Stop Loss at 1.5 ATR: 50 × 1.5 = 75 pips from entry

Stop Loss at 2 ATR: 50 × 2 = 100 pips from entry

During high volatility (ATR = 80), the same 1.5× stop would be 120 pips, automatically adjusting to market conditions.

Common ATR Multiples

  • 1.0 ATR: Tight stop - may get stopped out by noise
  • 1.5 ATR: Standard stop - good balance
  • 2.0 ATR: Wide stop - lets trade breathe
  • 3.0 ATR: Very wide - for trend following strategies

Position Sizing with ATR

Risk the same dollar amount regardless of volatility:

Position Size = Risk Amount / (ATR × Multiplier × Pip Value)

How GarudaAlgo Uses ATR

GarudaAlgo Enhancement

GarudaAlgo uses ATR to set dynamic stop loss suggestions and calculates optimal take profit levels based on ATR multiples. We also track ATR expansion/contraction for volatility breakout signals.

ATR in Signal System

ATR is part of the 4% Volatility Check weight in GarudaAlgo's signal system.

What GarudaAlgo Analyzes

  • Current ATR Value: For stop loss and take profit calculations
  • ATR Trend: Rising ATR = increasing volatility
  • ATR vs Average: Is current volatility high or low vs normal?
  • ATR Expansion: Sudden ATR spike often signals breakout
  • Suggested SL/TP: Based on 1.5× and 2× ATR multiples

Trading Strategies

Strategy 1: ATR Trailing Stop

  1. Enter trade based on your strategy
  2. Set initial stop at 2× ATR from entry
  3. As trade moves in profit, trail stop by 2× ATR from highest point
  4. Never move stop backwards - only forward
  5. Let the trailing stop take you out when trend reverses

Strategy 2: Volatility Breakout

  1. Monitor for ATR compression (lower than average)
  2. When ATR breaks above recent average, expect big move
  3. Trade the breakout in direction of initial move
  4. Higher ATR = bigger potential moves

Strategy 3: Volatility Filter

  1. Calculate ATR average over 100 periods
  2. Only take trades when ATR is near or above average
  3. Low ATR = choppy markets with false signals
  4. This filters out many losing trades in quiet markets

Best Practices

  • ATR doesn't show direction — It only measures how much, not which way
  • Use for stop losses over fixed pips — ATR adapts to each instrument and condition
  • 14 period is standard — But 10 or 20 work fine for different sensitivities
  • Watch for ATR expansion — Often precedes big moves
  • Compare to historical average — Is current volatility high or low?