Average True Range

ATR, another Wilder original (1978), measures the typical "size" of bars — how much price moves within a single period plus any overnight gap. It is the foundation of most volatility-aware risk management: stops sized in ATR, position sizing in ATR, slippage models in ATR.

The "True" in True Range matters: it accounts for overnight gaps. A bar's True Range is the largest of (a) high − low, (b) |high − previous close|, (c) |low − previous close|. This catches the case where price gaps overnight and the actual price travel is far larger than the visible bar range.

For N-period ATR (default 14):

1. For each bar, compute True Range:

TR = max( High − Low, |High − PrevClose|, |Low − PrevClose| )

2. ATR = Wilder-smoothed average of TR over N bars.

The Wilder smoothing seeds the first ATR value as the SMA of the first 14 TRs, then each subsequent value is:

ATR_new = (ATR_prev × 13 + TR) / 14

ATR is a volatility unit, not a direction signal. Its value is in scaling other things:

Stop sizing. A "2× ATR" stop sets risk at twice the typical bar's range, automatically tightening in calm markets and widening in volatile ones.

Position sizing. Risk a fixed dollar amount, then size = risk ÷ (entry distance to stop in ATR units). This produces consistent dollar risk regardless of volatility regime.

Volatility regime detection. Rising ATR signals expanding volatility (often before/during major moves). Falling ATR signals consolidation.