How to Use ATR to Measure Volatility: Stop Distance and Position Size

What ATR measures

ATR (Average True Range) measures, in price units, how far a single bar usually moves. It was introduced by J. Welles Wilder, who also created RSI, and it looks only at the size of moves, not at whether price will rise or fall. If Bitcoin's daily ATR is $2,000, the daily range has averaged around $2,000 over a little more than the last two weeks. The value is widely used as a reference when deciding how far away to place a stop-loss, and how large a position to take to carry the same risk.

True range (TR): why the previous close is included

ATR is built from the true range (TR), calculated for each bar. TR is the largest of the three values below. The previous close is included because of gaps. If the previous bar closed at 100 and the next bar opened at 106 and traded between 105 and 110, high − low is only 5, but price actually moved from 100 to 110, so TR is 10. Crypto trades 24 hours a day, so the next bar usually opens near the previous close, and in most cases TR is the same as high − low.

• High − low: how far price moved within the bar
• |High − previous close|: grows when there is a gap up
• |Low − previous close|: grows when there is a gap down
• The first bar has no previous close, so only high − low is used

ATR: Wilder's average of TR

ATR is TR averaged with Wilder's method, and TradingView's default length is 14 bars. The first ATR is the simple average of the first 14 TRs; after that, ATR = (previous ATR × 13 + current TR) ÷ 14. Because this exponential average (RMA) takes in only 1/14 of each new TR, old values do not drop out all at once as they do in a simple 14-bar average; they fade gradually. It takes a little over 9 bars for the influence of one large bar to fall by half. This is why a simple average of TR in a spreadsheet comes out slightly different from TradingView's value.

It is in price units, so convert it to a percentage

ATR is in the same units as price, so it cannot be compared directly between coins. That is why it is converted into a percentage of price: ATR ÷ close × 100. At a price of $60,000 with an ATR of $1,800 it is 3%; at a price of $0.50 with an ATR of $0.03 it is 6%, so the second coin swings twice as much even though its numbers are smaller. The same coin's ATR also grows as its price multiplies, so percentages are the right basis for comparisons over several years too. Changing the bar length changes ATR as well. Daily ATR is larger than 1-hour ATR, but not 24 times larger, because the ups and downs within a day cancel each other out.

Volatility comes in clusters

Price volatility tends to persist: large moves are followed by large moves, and quiet stretches by quiet stretches. This property, called volatility clustering, is widely observed not only in crypto but also in stocks and currencies. It is the reason recent ATR is used as a yardstick for how much price may swing in the near future. As the figure shows, however, ATR grows over several bars after a sharp move begins, and stays high for a while even after price has returned to where it was. Being an average, it always lags behind, and a low ATR is only a record that things have been quiet so far, not a sign that they will stay quiet.

Setting stop distance as a multiple of ATR

ATR is widely used to decide where to place a stop-loss. The idea is to put the stop several ATRs away from the entry price, so that ordinary swings alone do not trigger it. Two or three times ATR are common examples, but there is no set value: a small multiple gets hit by noise often, while a large one makes each loss bigger. Once the stop distance is set, position size is calculated as the loss you can accept ÷ the stop distance. If volatility doubles, the stop distance doubles and the position size halves, so the amount you can lose on one trade stays the same. The article on stop-loss and position size covers the calculation in detail.

• Example: you have decided you can accept a loss of $1,000 per trade
• Price $100, ATR $4, 2× → stop at $92 (distance $8)
• Size = 1,000 ÷ 8 = 125 units
• If ATR is $8, the distance is $16 → 62.5 units

Indicators built on ATR

ATR also serves as a building block for other indicators. Supertrend draws a trailing line a multiple of ATR away from (high + low) / 2 (TradingView's default is a 10-bar ATR with a multiplier of 3) and treats a close beyond that line as a change in direction. The Keltner Channel is a band set a multiple of ATR above and below an exponential moving average; this site's Bollinger Band Squeeze Scanner flags a squeeze when the Bollinger Bands move inside a Keltner Channel of EMA20 ± 1.5 × ATR(20). The Futures Liquidation Calculator shows stop prices 1.5, 2 and 3 times ATR(14) away, and whether each stop would be reached before the liquidation price. They all use the same idea: a multiple of the usual swing.

What ATR does not tell you

ATR does not tell you the direction. It grows the same way whether price keeps crashing or keeps surging, so a rising ATR alone does not mean a trend has started or ended. And because it is a 14-bar average, extreme moves, such as the moment a cascade of liquidations hits, get buried in the average. A stop set as a multiple of ATR is also based only on past swings, and in a sudden move the order can be filled at a worse price than the stop. ATR is a ruler for measuring the size of risk, not a value that promises anything about future moves.