What is ATR in trading?

Developed by J. Welles Wilder for trading commodities and subsequently introduced in his book “New concepts in technical trading systems,” the ATR is a simple moving average (SMA) or exponential moving average (EMA) of the true range (TR) values. Generally, the ATR calculation is based on 14 days (can also be intraday, weekly, or monthly).

How many ATRs can a trading system use?

This technique may use a 10-period ATR, for example, which includes data from the previous day. Another variation is to use multiple ATRs, which can vary from a fractional amount, such as one-half, to as many as three. (Beyond that, there are too few trades to make the system profitable.)

How do traders exit a trade?

Traders may choose to exit these trades by generating signals based on subtracting the value of the ATR from the close. The same logic applies to this rule – whenever price closes more than one ATR below the most recent close, a significant change in the nature of the market has occurred.

What is the difference between short trades and ATR breakouts?

Short trades are the opposite; the ATR or a multiple of the ATR is subtracted from the open and entries occur when that level is broken. The ATR breakout system can be used as a longer-term system by entering at the open following a day that closes above the close plus the ATR or below the close minus the ATR.