ATR Indicator Explained: Measuring Market Volatility

Average True Range (ATR) measures how much an instrument typically moves in a period. It is not directional — it does not say up or down — it says how far. That makes it the backbone of volatility-aware risk in Setup.Cash.

What ATR Measures

True Range is the largest of: the current high−low, the high vs previous close, and the low vs previous close (so gaps count). ATR is a smoothed average of True Range over a period (default 14). A higher ATR means bigger swings; a lower ATR means quiet conditions.

Why ATR Matters for Risk

ATR shines in two places:

1. Stops. An ATR-based stop (e.g., 1.5× ATR) adapts to volatility — wide in fast markets, tight in calm ones. This keeps your stop out of the noise.
2. Position sizing. Size the position from the ATR stop distance so every trade risks the same amount regardless of how volatile the instrument is.

This is why ATR stops are the recommended default across changing conditions.

ATR as a Regime Filter

ATR also tells you whether to trade. Rising ATR means expanding volatility (good for breakouts); very low ATR means a quiet, coiled market (a squeeze may be brewing). Some strategies only trade when ATR is above a threshold to avoid dead markets.

Building It in Setup.Cash

Add the ATR indicator in the builder and use it in the risk node (ATR stop/target) or as a condition (e.g., only enter when ATR is rising). In text-to-strategy, just say "ATR stop 1.5x and 2R target."

Tuning

• Length 14: the standard.
• Shorter (7–10): more reactive to recent volatility.
• Longer (20+): smoother, slower to change.

Build a Custom ATR Tool

In the Indicators Lab the atr function is built in, so you can create volatility tools — ATR bands, an ATR-normalized oscillator, or a volatility regime flag. Generate one with AI or write it by hand.

ATR will not tell you where to enter, but it tells you how much room to give a trade and how big to size it — the two decisions that protect your capital. Build it into every strategy's risk model and validate with backtesting.