ATR explained: volatility, stops and targets
Average True Range is the one indicator in this set that says nothing about direction. It measures how much a market moves, and that turns out to be the thing a stop, a target and several other indicators all need to know. In SixOne8 it appears twice: as a condition, and as the unit your exits are measured in.
What it measures
A bar's true range is the biggest of three distances: the bar's own high to low, the high to the previous close, and the low to the previous close. The last two matter when a bar opens away from where the previous one closed — a gap — because the market moved that far even though no single bar shows it. ATR is the average of that figure over the last N bars, fourteen by default.
So an ATR of 0.0050 on EUR/USD on the daily chart says the pair has been moving about fifty pips a day lately. It does not say which way. A market falling hard and a market rising hard have the same ATR.
As a condition
Raw ATR is in price, so a threshold that means something on a currency pair means nothing on Bitcoin. SixOne8 compares ATR as a percentage of price for exactly that reason: a threshold of 0.5% is the same statement — "this market has been moving about half a percent a bar" — on every instrument.
- Greater than / less than a level. True while the market is moving more, or less, than that much per bar. The usual use is as a filter: require enough movement for a trade to be worth anything, or rule out a market that has gone wild.
- Rising / falling. Volatility picking up, or dying down, bar over bar.
ATR(14) on 1h · greater than · 0.10%
As the unit for stops and targets
This is where ATR earns its place. A stop set a fixed percentage from the entry is the same distance on a quiet day and a violent one, so the same number means a completely different trade depending on when it fired — on the quiet day it is wide enough to survive the noise; on the violent day the noise alone takes it out. A stop set at two times ATR scales with the market and the moment: it is wider when bars are big and tighter when they are small, on every instrument, without a table of per-market settings.
That is why the exit in a backtest defaults to ATR multiples — a stop and a target each a number of ATRs from the entry, the ATR read at the moment the trade opens — and why Refine measures every variation it tries with the same ATR bracket, so the variations compare like for like. A percentage exit is still there for when you want it; it is just not the default.
Where else it appears
Supertrend is a line placed a multiple of ATR away from price that flips sides when price closes through it, so its distance from price widens as volatility rises. Keltner channels are a moving average with ATR-width bands. If an indicator adapts its size to how much the market is moving, ATR is usually what it is adapting with.
What it cannot tell you
Which way anything is going, or whether a two-ATR stop was the right width for a given strategy on a given market. That second question is what a parameter search across the stop distance answers — for the history it was run over.