Average true range measures volatility — how much a market typically moves. Here's how to use it to set stops and size positions, with a worked example.

What is the ATR?

Average true range (ATR) measures one thing: how much a market typically moves in a given period. It says nothing about direction — a high ATR means large swings whether price is rising or falling, and a low ATR means a quiet, tight market. Developed by Welles Wilder, it is one of the more useful indicators a systematic trader has, because it turns the vague idea of "volatility" into a number you can size a stop or a position against.

What it measures

The "true range" of a single bar is the largest of three distances: high to low, the previous close to the high, and the previous close to the low. Taking the previous close into account catches gaps that a plain high-minus-low would miss. ATR is simply an average of the true range over a lookback — 14 periods by default. The result is expressed in the instrument's own units: pips on a forex pair, points on an index.

Reading it

A GBP/USD daily ATR of 90 pips means that, lately, the pair covers about 90 pips of range on an average day. That single figure reframes a lot of decisions. A 20-pip stop on a market that swings 90 pips a day is not "tight" — it sits inside the daily noise and will likely be hit at random. ATR gives you a sense of what normal movement looks like, so your levels sit outside the noise rather than inside it.

Using it for stops

The common approach is to place a stop a multiple of ATR away from entry — often 1.5x or 2x. If the daily ATR is 90 pips and you use 1.5x, your stop sits 135 pips from entry. The logic is that a stop should survive ordinary movement and only trigger on something genuinely against you. When volatility rises, ATR rises and your stops widen automatically; when markets calm down, they tighten. The stop adapts to conditions instead of being a fixed number you picked out of habit.

Using it for position sizing

This is where ATR earns its place. If your stop distance is set by volatility, your lot size has to flex to keep the money risked constant. The chain runs: fixed risk in pounds → ATR-based stop distance → lot size that makes the two agree.

A worked example

You risk 1% of a £10,000 account per trade — £100. GBP/USD daily ATR is 90 pips, and you set your stop at 1.5x ATR, so 135 pips.

Risk per trade: £100
Stop distance: 135 pips
Risk per pip allowed: £100 ÷ 135 = about £0.74 per pip
That is roughly 0.09 lots (1 pip on 0.1 lot ≈ £0.78)

Now volatility jumps and ATR climbs to 150 pips. Your stop widens to 225 pips, and to keep the risk at £100 the size has to fall: £100 ÷ 225 ≈ £0.44 per pip, about 0.06 lots. Same £100 at risk, smaller position, because each pip now costs more. Ignore this and a fixed 0.1-lot habit would have you risking far more in the volatile market than the calm one — for no reason you chose.

ATR sizes risk; it does not predict direction. A high ATR does not mean a move is coming your way — only that when moves come, they are large. Treat it as a volatility gauge, never as a signal to buy or sell.

A caution

ATR is backward-looking: it describes recent volatility, and a sudden news shock can blow past any multiple of it. It also says nothing about which way price goes. Used well, it keeps your risk steady across calm and stormy markets. Used as a trade signal, it will let you down, because measuring movement is not the same as predicting it.

The Karnek note

Karnek does not plot ATR or set your stops — it monitors your account, not your charts. What it shows is whether your live risk per trade stays steady or balloons when volatility spikes, across every position on the terminal. It is read-only and can never place a trade.

See it in Karnek: monitor your strategy live with Karnek.