Average True Range
Average True Range measures volatility as the average size of daily trading ranges, including gaps.
What It Measures
Volatility: how much price moves per day on average, accounting for gaps between closes.
The Math (Simplified)
For each day, compute True Range = max(high-low, |high-prev close|, |low-prev close|). ATR is the Wilder-smoothed average of that range over N days.
Default Inputs & Tuning
14 days is the classic setting. Lower values (7-10) react faster; higher values smooth more.
When It Works (Market Edge)
Position sizing and stop placement in volatile markets: ATR tells you how far price normally moves, so stops can be placed beyond noise.
When It Fails
As a directional signal alone: ATR only measures magnitude, not direction. High ATR means large moves, not up or down.
Common Myths
Myth: High ATR means you should buy because volatility is good.
Truth: High ATR just means larger daily ranges. It can happen in crashes, rallies, or choppy markets equally.
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