Average True Range (ATR)

True Range before ATR

True Range (TR) is the greatest of three distances:

The previous-close terms allow the measure to capture gaps or discontinuities that a simple high-low range would miss. In continuously traded crypto, classical overnight gaps are less common than in equities, but exchange outages, weekend venue differences and sudden jumps can still make previous-close comparisons relevant.

ATR smoothing and units

A common default is a 14-period Wilder-smoothed average of True Range. ATR is expressed in price units. BTC ATR of £2,000 and an altcoin ATR of £0.20 cannot be compared directly without considering their price levels.

Percentage normalisation can make cross-asset comparisons more meaningful, though liquidity, jump risk and market microstructure still differ.

Risk and execution applications

ATR is often used to scale stop distances, position sizes or volatility filters. The logic is to make risk rules adapt to changing movement rather than using an identical £ or % distance in every regime.

However, a stop belongs where the trade thesis is invalidated. ATR can tell you whether that invalidation is unusually close or far relative to current volatility; it should not replace the analytical invalidation itself.

Practical ATR workflow

1. Choose timeframe and lookback.
2. Calculate ATR or ATR% consistently from the same venue data.
3. Compare current ATR with its own history, not just an absolute number.
4. Use ATR to contextualise stop distance, expected noise and order spacing.
5. Review jump risk separately because extreme moves can exceed recent ATR by multiples.

For cross-asset screening, ATR% is usually more interpretable than raw ATR, but thinner altcoins can still have hidden liquidity risk not captured by candles alone.

Worked example: volatility-scaled risk

BTC trades at £80,000 with daily ATR of £2,400, so ATR% is approximately 3.0%. A planned structural invalidation at £76,800 is £3,200 away, or about 1.33 ATR.

If daily ATR later rises to £4,000 while price remains near £80,000, the same £3,200 stop is only 0.8 ATR away. Nothing about the chart level changed, but ordinary daily noise is now much larger relative to the stop distance.

The response is not automatically to widen the stop. It may instead mean reducing size, changing timeframe, waiting for conditions to stabilise or rejecting the setup.

Common mistakes and misunderstandings

• Treating ATR as directional because it rises during a sell-off.
• Comparing raw ATR across assets with very different prices.
• Assuming an ATR multiple is automatically a technically valid stop.
• Ignoring sudden gap/jump risk because recent ATR was low.
• Using an ATR calculated on one timeframe to size risk on another without adjustment.

Knowledge checkpoint

Q1. Why is ATR direction-neutral?

Q2. Why is ATR% often more useful than raw ATR for cross-asset comparison?

Q3. What is wrong with choosing a fixed 2 ATR stop before defining trade invalidation?

Q4. Why can a low ATR regime still contain large jump risk?

FAQ

Summary

• ATR measures recent range magnitude, not direction.
• True Range captures both intraperiod range and discontinuities versus the previous close.
• ATR% helps normalise volatility across differently priced assets.
• ATR is a risk context tool, not a substitute for structural invalidation.

Technical analysis describes observed price, volume and volatility behaviour. It does not remove market, execution, liquidity or model risk, and its usefulness depends on data quality, timeframe and regime.