In plain English
What Average true range means
ATR estimates how much price has been moving per bar, expressed in the asset’s price units. It measures movement size, not whether price is rising or falling. A daily ATR of 0.0080 in EUR/USD means recent daily ranges have averaged about 80 pips under that calculation, not that the pair is expected to move exactly 80 pips tomorrow.
Why it matters
Average true range provides context for volatility across timeframes and instruments. Traders may use it to compare recent movement with a planned order distance or to normalize a chart study. ATR does not identify trend direction, predict the next range, or set an appropriate position size without considering account risk and contract value.
Example
For one day, assume high is 1.1050, low is 1.0990, and the prior close is 1.1010. The three true-range candidates are 60, 40, and 20 pips, so true range is 60 pips. If a simplified 14-period ATR is 72 pips, that is the average recent true range, not a fixed daily limit.
Quick answers
Common questions
Does ATR show whether a market will rise or fall?+
No. ATR measures the scale of recent price movement without assigning a direction. A rising ATR can accompany either a sharp advance, a sharp decline, or wide two-way trading.
Why does ATR include the prior close?+
Including the prior close allows true range to capture a gap between one period’s close and the next period’s high or low. A simple high-minus-low range could miss that movement.
Sources