ATR and volatility: the complete guide

What volatility is

Volatility describes the amplitude of price changes. A calm market moves in small steps; a volatile one moves in large, abrupt ones. It changes over time, with quiet phases tending to be followed by active ones.

The Average True Range

J. Welles Wilder introduced the ATR in 1978. The true range of a candle is the largest of three values, which takes overnight gaps into account.

TR = max( high − low, |high − previous close|, |low − previous close| )
ATR = Wilder-smoothed average of TR over 14 periods

The result is in price units. An ATR of 2 on a 100 asset means that it has recently moved about 2 per period, or 2%.

Using the ATR

• Compare periods: a rising ATR means widening ranges, a falling ATR means compression.
• Compare assets: divide the ATR by the price (ATR %) to compare assets of different prices.
• Frame risk: many traders express a stop distance in multiples of ATR so it adapts to market conditions, instead of using a fixed number.

ATR vs Bollinger Bands

Bollinger Bands measure volatility through the standard deviation of closes around a moving average, while the ATR uses the actual range of candles, including gaps. Both rise and fall together most of the time, but they can differ around gaps.

Limits and InvestAI

The ATR lags: it is an average of the past and cannot announce a volatility burst. It also tells nothing about direction. InvestAI reports ATR and the detected range expansion in its readings so that you can see how large the recent moves have been, without turning it into a signal.