Definition of ATR
ATR stands for Average True Range. It is a volatility indicator that describes how much an asset’s price has been moving on average over a chosen number of periods (the lookback window). In forex, ATR is commonly calculated from price ranges in each period, then averaged. The key idea is simple: ATR summarizes variability of movement size, not bullish or bearish direction.
How ATR works in forex
ATR is based on “true range” for each period. True range uses three ingredients: the current period’s high, the current period’s low, and the prior period’s closing price. For each period, true range is the largest of:
- (current high − current low)
- absolute (current high − prior close)
- absolute (current low − prior close)
Then ATR is computed as the average of true range values over the lookback window. Because the prior close is involved, ATR connects consecutive periods; that is why a time series definition (for example, what counts as a “period” like a candle) matters.
Reading ATR in practical terms
If ATR is higher, the recent price movement size has generally been larger. If ATR is lower, movement size has generally been smaller. To make ATR easier to interpret, people often express ATR in the instrument’s price units (and sometimes convert to “pips” by using the instrument’s pip convention). The conversion depends on how your market data defines pip size.
Example: what ATR is measuring (and what it is not)
Assume you use 14 periods and you compute true range each period using high, low, and prior close. The ATR value is then the mean of those 14 true range numbers. This means ATR is an input-output summary: given the same price series and the same window, you should get the same ATR formula result (up to rounding).
ATR does not, by itself, tell you whether price will rise or fall next. Direction is separate. For that reason, treating ATR as a standalone signal can be misleading: it only helps describe typical movement size under the specific assumptions of the calculation.
Limitations and failure modes
- Market regime shifts: ATR reflects what happened recently. After a volatility regime change, historical relationships can stop matching the new environment.
- Event spikes and outliers: sudden news or structural moves can create very large true range values, which then influence ATR for a while.
- Data and conventions: different providers may have slightly different candle construction, session handling, or rounding. Since ATR depends directly on high/low/prior close, these differences can create different ATR numbers.
- Costs and execution are not included: ATR is computed from price history only. Real outcomes can be affected by spreads, commissions, slippage, and operational constraints—factors ATR does not model.
How to verify ATR facts independently
To verify ATR, use the same OHLC data and the same lookback window, then recompute true range and average it. You can also cross-check that your ATR increases when the observed ranges (high/low and gaps versus prior close) expand, and that it decreases when typical ranges shrink. If your ATR does not behave consistently with those mechanics, revisit your period definition, prior close handling, and any pip/unit conversions.