what does the atr tell you 
wilder originally developed the atr for commodities although the indicator can also be used for stocks and indices 2 simply put a stock experiencing a high level of volatility has a higher atr and a lower atr indicates lower volatility for the period evaluated the atr may be used by market technicians to enter and exit trades and is a useful tool to add to a trading system it was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations the indicator does not indicate the price direction instead it is used primarily to measure volatility caused by gaps and limit up or down moves the atr is relatively simple to calculate and only needs historical price data the atr is commonly used as an exit method that can be applied no matter how the entry decision is made one popular technique is known as the chandelier exit and was developed by chuck lebeau the chandelier exit places a trailing stop under the highest high the stock has reached since you entered the trade the distance between the highest high and the stop level is defined as some multiple multiplied by the atr 3image by sabrina jiang investopedia 2020the atr can also give a trader an indication of what size trade to use in the derivatives markets it is possible to use the atr approach to position sizing that accounts for an individual trader s willingness to accept risk and the volatility of the underlying market example of how to use the atras a hypothetical example assume the first value of a five day atr is calculated at 1 41 and the sixth day has a true range of 1 09 the sequential atr value could be estimated by multiplying the previous value of the atr by the number of days less one and then adding the true range for the current period to the product next divide the sum by the selected timeframe for example the second value of the atr is estimated to be 1 35 or 1 41 5 1 1 09 5 the formula could then be repeated over the entire period while the atr doesn t tell us in which direction the breakout will occur it can be added to the closing price and the trader can buy whenever the next day s price trades above that value this idea is shown below trading signals occur relatively infrequently but usually indicate significant breakout points the logic behind these signals is that whenever a price closes more than an atr above the most recent close a change in volatility has occurred 2image by sabrina jiang investopedia 2020limitations of the atrthere are two main limitations to using the atr indicator the first is that atr is a subjective measure meaning that it is open to interpretation no single atr value will tell you with any certainty that a trend is about to reverse or not instead atr readings should always be compared against earlier readings to get a feel of a trend s strength or weakness second atr only measures volatility and not the direction of an asset s price 1 this can sometimes result in mixed signals particularly when markets are experiencing pivots or when trends are at turning points for instance a sudden increase in the atr following a large move counter to the prevailing trend may lead some traders to think the atr is confirming the old trend however this may not be the case 