What it means
True range is the largest of: high − low, |high − previous close|, |low − previous close|. ATR is the average of true range over a period, usually 14 candles (Wilder's smoothing).
It measures how much price typically moves per candle. It says nothing about direction.
Why traders use it
Volatility changes. A fixed stop of 10 points can be too tight in a wild market and too wide in a quiet one. Expressing stops, targets and filters in ATR keeps them proportional to current conditions.
Chart examples
ATR rises when candles expand
How to identify it objectively
- 1Use a fixed period (14 is standard).
- 2Rising ATR: candles getting larger; falling ATR: compression.
- 3Compare a candle's body or range with ATR to judge whether it is unusually large.
- 4Use the same timeframe's ATR as the setup.
Bullish use
- 1Set the long stop below structure plus a fraction of ATR (for example 0.25–0.5×).
- 2Treat a bullish body of at least 1× ATR as displacement.
- 3Scale position size down when ATR rises.
Bearish use
- 1Set the short stop above structure plus an ATR buffer.
- 2Treat a bearish body of at least 1× ATR as displacement.
- 3Avoid entries when ATR is extreme and stops would be huge.
What confirms it
- ATR is calculated on closed candles.
- The multiple used is fixed in your rules.
What invalidates it
- Using ATR as a direction signal.
- Mixing ATR from different timeframes.
How a hypothetical setup is built
Entry
ATR does not create entries; use it inside another rule.
Stop
Structural stop + 0.25–0.5× ATR buffer.
Target
A multiple of ATR or the next level.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Technical IndicatorsSupertrend
- Technical IndicatorsPivot Points
- Risk Management & StatisticsPosition Sizing
- Full guide on The TradeskillDisplacement and Candle-Close Confirmation
Historical testing
Not tested on The Tradeskill as a standalone method, because it is not a signal. The Session Liquidity Playbook uses ATR for its displacement and stop-buffer rules.
Limitations: when it fails
- ATR lags: it reflects past volatility.
- Gaps and news spikes inflate it.
- It is relative to the instrument, so values cannot be compared between markets.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.