ATR Indicator on a Live Gold Chart

What it shows

The ATR sits in its own pane with no guide lines. Its scale is the chart’s price unit, so on gold each reading is in dollars per ounce.

How Pravex works it out

1. True range starts from high − low and stretches to the previous close when price gapped past it: the biggest of high − low, |high − previous close| and |low − previous close|. The very first candle has nothing before it and uses high − low.
2. Average the true range over Length candles, 14 by default.
3. The average type setting picks how that is done. RMA, the default, is the Wilder way: the first value is a plain average and each new one keeps 13/14 of the old line and adds 1/14 of the new true range. SMA, EMA and WMA are the other choices.

Settings

Setting	Default	What changing it does
Length	14	How many candles the average covers. A shorter length follows the latest candles closely; a longer one moves slowly.
Average type	RMA	The kind of average applied to the true range: RMA, SMA, EMA or WMA. SMA weights every candle in the window the same; EMA and WMA lean on the newest; RMA changes more slowly than an EMA of the same length.

How traders read it

The ATR is mostly used to size things. A stop placed 1.5 times the ATR away from the entry gives the trade room that scales with how big candles currently are. A calm week and a news-driven week then get different distances without any manual change.

A rising ATR says candles are getting bigger, often around breakouts and news. A falling ATR says the market is quieting down. Traders sometimes treat a long run of low readings as a squeeze that comes before a larger move.

A made-up example, not a live reading: with an ATR of 8 on a gold chart, an average candle’s true range has been about 8 dollars, so a stop 12 dollars away is 1.5 ATR.

When it misleads

The ATR knows how big candles are, not which way they go, so a rising line fits a crash as well as a rally. It is an average, and one large candle drags it up, and that candle’s effect then fades over the next candles while nothing new happens in the market. Its numbers are tied to the price scale and the timeframe, so the same reading means different things on the 15-minute chart and on the daily chart. Gold has no weekend candles, but the gap from Friday’s close to the Sunday open still counts in the first true range of the week.

Questions and answers

What does the ATR tell you?

The average size of a candle’s true range over the last 14 candles, in price units. It is a measure of how much price has been moving per candle, not of where it is going.

How do you use the ATR for a stop loss?

Set the stop a multiple of the ATR away from the entry, 1.5 times for instance. The distance then grows when candles are big and shrinks when they are small. The multiple is a personal choice, not a rule in the formula.

Why is the gold ATR so much higher on the daily chart?

A daily candle holds about 23 hourly ones, so its true range is far wider, and the ATR is measured in dollars of that range. The 1-hour and the daily ATR answer different questions: how far gold moves in an hour, and how far in a day.

Should I use RMA or SMA for the ATR?

RMA, the Pravex default, is the original Wilder smoothing and lets an old spike fade slowly. An SMA drops the spike all at once when it leaves the 14-candle window, so the line steps down suddenly. EMA sits between the two.

Related: Bollinger Bands, Keltner Channels, Donchian Channels, Parabolic SAR, every indicator.