advanced · TRADING LEARNING GUIDE
ATR and volatility
What is this concept?
True range is the maximum of high−low, absolute high−previous close and absolute low−previous close. ATR smooths true range over a chosen length; it measures movement, not direction.
Step by step
Use completed bars, document smoothing and length, and keep price units consistent. A volatility-based distance still needs sizing and execution allowances.
From observation to decision
Record the instrument, venue, session and timeframe. Classify the observation using the definition, then write at least one alternative interpretation. Decide what evidence would invalidate your idea before entry. Mark missing information explicitly. Examples are hypothetical. Collect paper observations, including failures. Include fees, spread, slippage and timestamp alignment when measuring outcomes. Recognizing a chart shape and establishing a profitable trading rule are separate tasks.
Worked example
Previous close 100, H104 L102 gives TR=max(2,4,2)=4. ATR 2.5 with multiplier 1.5 gives a distance of 3.75, not a guaranteed loss bound.
Common mistakes and limits
Do not interpret high ATR as bullish or assume identical ATR across timeframes and smoothing methods.
Practice
Calculate true range for five bars including a gap. Compare fixed and ATR-based stop distances with quantity adjusted.
Resources and further reading
These sources explain definitions and underlying mechanics. Worked examples are original illustrations; a source does not establish the profitability of a custom pattern.
Further reading / foundational context. Worked examples on this page are original illustrations, not source performance claims.