What it is
Average True Range, introduced by Wilder in 1978, measures how much an instrument moves per bar in price units. It is a pure volatility measure and carries no directional information whatsoever: a large ATR simply says the market is covering a lot of ground, not which way it is going.
How it works
True range for a bar is the largest of three distances: the bar's high minus its low, the absolute difference between the high and the previous close, and the absolute difference between the low and the previous close. Including the previous close is what makes the range true, because it accounts for overnight gaps that a plain high-low range would miss entirely. ATR is then Wilder's smoothed average of true range, conventionally over 14 periods.
How traders use it
The practical value of ATR is that it converts a chart into a common unit. A stop placed a multiple of ATR beyond entry adapts automatically to quiet and volatile regimes. A position sized as risk budget divided by an ATR-based stop distance gives every trade a comparable risk contribution regardless of instrument. Targets, trailing stops and volatility filters all become portable in the same way, and dividing ATR by price gives a percentage figure that lets you compare a $9 stock with a $600 one.
Where it breaks down
Because it is an average of past bars, ATR expands after volatility has arrived rather than before, and a single gap or limit move can keep it inflated for weeks. It also has no opinion about direction, so it can never confirm a trade thesis; pairing a wide ATR with a directional read is entirely the user's responsibility. Comparing raw ATR values across instruments without normalising by price is a frequent and easily avoided mistake.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.