Average True Range and Volatility
Average True Range, or ATR, measures the typical magnitude of price movement including gaps from the previous close. It has price units and no directional sign.
How it works
For each bar, true range is the maximum of high−low, abs(high−previous close), and abs(low−previous close). Wilder ATR uses a simple-average seed followed by recursive smoothing. ATR divided by price can help compare proportional volatility, but instrument conventions and sampling periods still matter.
Worked example
Suppose the previous close is 100 and the next high/low are 107/103. The intrabar range is 4, but true range is max(4,7,3)=7 because of the opening gap. If the prior 14-period ATR is 2, the next Wilder ATR is (13×2+7)/14≈2.36. A two-ATR distance would then be about 4.71 price units.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
ATR is backward-looking; a future gap can greatly exceed it. A stop based on ATR does not cap actual loss during a gap. Ensure position sizing includes contract multiplier and tick value rather than treating all instruments as ordinary shares.
Knowledge check
Why can true range exceed high minus low?
Read the explanation
Because the move from the previous close to the current range may be larger than the movement within the bar itself.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.