What it is
ATR averages the true range over a lookback period, giving a single number for normal movement. It says nothing about direction.
How traders use it
- To size stops relative to normal movement
- To set realistic targets
- To compare volatility between instruments
Worked example
A stock with a $2 ATR will not respect a $0.10 stop. ATR tells the trader the stop is too tight before the trade is placed.
Limitations
- Backward looking
- Spikes after a single unusual session
Common mistakes
- Using the same fixed stop across very different instruments
Educational content only. TradeCaster does not provide financial advice and past results never imply future performance.