ATR (Average True Range): how to size for volatility

ATR measures average true range — the size of typical recent candles — giving you a volatility number you can size stops and positions against.

How ATR is computed

True Range of a candle is the largest of: (high − low), (high − previous close), (previous close − low). ATR is a smoothed average of TR over a window — usually 14 periods.

The smoothing uses Wilder's method (an exponential-style weighting). The number reports in price units — for a stock at $400 trading with ATR(14) = $6, daily candles typically range $6.

Why traders use it

ATR is the foundation of volatility-aware position sizing. A common rule: stop at 1.5× ATR below entry; position size such that the stop's loss is some fixed percent of account (1-2%). The same rule produces tighter positions in volatile markets and larger positions in calm ones — exactly the inverse of what feels intuitive.

ATR also informs whether a breakout is real. A breakout candle that is only 0.3× ATR is statistically noise; a breakout that is 1.5× ATR is structural.

How Signodex uses ATR

Signodex computes ATR(14) on every chart and surfaces it in the indicator readout. The AI characterises the current ATR relative to the asset's recent history ("Current ATR is 2.1× the 90-day median, indicating elevated volatility"). The number is informational; the AI does not size trades for you.