ATR was developed by J. Welles Wilder Jr. and measures volatility by averaging the True Range over a specified lookback period, typically 14 bars. The True Range accounts for gaps by taking the greatest of three values: the current high minus low, the absolute difference between the current high and the previous close, or the absolute difference between the current low and the previous close. ATR does not indicate price direction — it only measures how much an asset is moving. This makes it invaluable for practical risk management: stop losses placed at 1.5× to 2× ATR below entry account for real market noise rather than arbitrary fixed distances. Position sizing becomes more consistent when adjusted for current ATR — smaller size when ATR expands, larger size when it contracts — keeping dollar risk stable across different volatility regimes.
