ATR Overview

The Average True Range (ATR) measures market volatility by calculating the smoothed average of “true range” — the greatest of: current high-low, |high-previous close|, or |low-previous close|. ATR doesn’t indicate direction, only how much price is moving.

ATR is essential for position sizing, stop-loss placement, and volatility-based filtering. High ATR means wide price swings (use wider stops), low ATR means tight ranges (potential breakout setup or tighter stops).

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How Average True Range Works

Core Concept

1. Calculate True Range: max(High-Low, |High-PrevClose|, |Low-PrevClose|) — accounts for gaps
2. Apply RMA Smoothing: Smooth the true range values over n periods
3. Normalize (%): ATR is expressed as a percentage of price for cross-asset comparison
4. Interpret: Higher ATR = more volatility, Lower ATR = less volatility

Key Characteristics:

• Volatility Only = Measures magnitude of price movement, never direction
• Gap-Aware = True Range accounts for overnight gaps that High-Low range misses
• Percentage-Based = Normalized for comparison across different-priced assets
• Dynamic Stops = ATR-based stops adapt to current market volatility

Visual Interpretation

ATR Behavior:

• ATR rises during volatile periods (large price swings)
• ATR falls during calm periods (tight ranges)
• ATR spikes at the start of major moves
• Low ATR often precedes breakouts (volatility compression)
• ATR doesn’t indicate direction — only magnitude

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Trading Signals Available on Reversion

These are the signal names you select when configuring ATR in the algorithm builder or via the MCP agent:

Signal	Triggers When	Typical Use
atr_above_threshold	ATR value rises above threshold	Volatility expanding — wider stops, breakout potential
atr_below_threshold	ATR value falls below threshold	Volatility contracting — tighter stops, squeeze potential
atr_above_signalLine	ATR crosses above its signal line	Volatility increasing
atr_below_signalLine	ATR crosses below its signal line	Volatility decreasing

Display: Separate pane

Category: Volatility

Threshold range: 0 – 100 (percentage-based)

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Key Characteristics

Strengths

What Average True Range Does Well:

• Best Volatility Measure: ATR is the standard for measuring market volatility
• Gap-Aware: True Range captures overnight and weekend gaps
• Dynamic Position Sizing: ATR-based sizing adapts to current volatility
• Universal Application: Works on all assets and timeframes

Limitations

What to Watch Out For:

• No Direction: ATR doesn’t tell you which way price will move
• Lagging: RMA smoothing means ATR confirms volatility changes after they begin
• Not Predictive: Low ATR doesn’t guarantee a breakout will follow

Best Use Cases

When to Use Average True Range:

• Stop-Loss Placement: Set stops at 1.5-3× ATR from entry for volatility-adjusted protection
• Position Sizing: Scale position size inversely with ATR — smaller positions in volatile markets
• Volatility Filter: Trade breakouts when ATR is low (compression) or avoid entries when ATR is extremely high

When NOT to Use Average True Range:

• Direction Signals: ATR never indicates which way to trade
• Standalone System: Must combine with directional indicators

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Note

Pro Tip: ATR’s most powerful application is volatility-adaptive stop losses. Instead of fixed percentage stops (5%), use ATR-based stops (2× ATR). In calm markets, stops are tight (protecting profits). In volatile markets, stops are wider (avoiding premature exits from noise). This single change can dramatically improve strategy performance across different market conditions.