ATR (average true range) is an indicator developed by John Welles Wilder jr with the intention to calculate price volatility.

To construct the Average True Range, it is first necessary to calculate the TR (True Range), which is given by the largest in absolute value between the following ranges:

• today's high and today's minimum,
• closing yesterday and today's high,
• closing yesterday and today's minimum.

The ATR is simply a 14 period True Range moving average.

The ATR provides a proportional measure of the current trend. Therefore, an increase in the Average True Range (and True Range) signals an increase in price volatility, while a decrease signals a decrease in price volatility.

Trend reversals usually develop when volatility is at extreme levels (or very high or very low) and therefore the analysis of the ATR is aimed at the search for maximum and minimum volatility with the expectation of a possible inversion in prices.

Stop loss with the ATR

Many traders use this indicator in order to calculate the correct level of stop loss and target price in a given trading operation.

In the below image we can see the 200-period ATR applied to the daily chart of EURUSD, which has a value of 0,00745, or about 74 pips.

A correct level of stop loss could be placed at a level, compared to the entry point of our operation, at a distance of 74 X 2 pips, or 148 pips.