Average True Range (14)

The Average True Range (14) is a volatility indicators indicator used in Skyrexio Strategy Builder for volatility assessment and risk management.

Introduction

The Average True Range (ATR) is a volatility measurement indicator that provides risk management and position sizing capabilities for both LONG and SHORT strategies. This essential volatility indicator measures market volatility by calculating the average of true ranges over a specified period, making it crucial for adaptive stop-losses, position sizing, and volatility-based strategy selection in cryptocurrency markets.

How Average True Range Works

Average True Range (ATR) was developed by J. Welles Wilder Jr. to measure market volatility. True Range is the maximum of: (High - Low), (High - Previous Close), (Low - Previous Close). ATR is the average of True Range over 14 periods.

• Volatility measurement - Quantifies market volatility in absolute price terms • Adaptive risk management - Enables dynamic stop-losses that adjust to market conditions • Position sizing - Helps determine appropriate position sizes based on volatility • Breakout confirmation - Expanding ATR often confirms significant price movements • Strategy selection - High ATR suggests trend-following, low ATR suggests mean-reversion

Volatility Psychology: ATR reflects market uncertainty and participant disagreement. High ATR indicates high uncertainty with large price swings, while low ATR suggests market consensus with small price movements. This makes ATR essential for adapting trading strategies to current market conditions.

Key Characteristics

Attribute	Details
Category	Volatility Indicators
Type	Risk Management & Volatility Measurement
Primary Use	Position sizing, stop-loss placement, strategy selection
Timeframe	All timeframes supported (1m to 1M)
Confirmation	Volume, price breakouts, trend strength

Strategy Applications

🟢 LONG STRATEGY (Primary Use)

ATR is excellent for LONG strategies by providing dynamic stop-losses, optimal position sizing, and volatility-based entry conditions that adapt to market conditions.

Base Entry Order (LONG)

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

AND

First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (50)
Timeframe: 1H

Additional Entry Orders (LONG)

Additional Entry 1: Volatility expansion confirmation
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 0.02

AND

First Condition: Volume
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

OR

Additional Entry 2: Breakout with volatility
First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: High Price
Timeframe: 1H

AND

First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (10)
Timeframe: 1H

Take Profit Orders (LONG)

Rule 1: Exit condition - Volatility contraction (trend exhaustion)
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Cross Below
Second Condition: Simple Moving Average (20)
Timeframe: 1H

OR

Rule 2: Exit condition - ATR-based profit target
First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 1.03

OR

Rule 3: Exit condition - High volatility warning
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 0.05

AND

First Condition: RSI
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 70

Stop Loss Orders (LONG)

Rule 1: Stop loss - ATR-based adaptive stop
First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 0.975

OR

Rule 2: Stop loss - Volatility spike (risk management)
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 0.08

OR

Rule 3: Stop loss - Trend breakdown with volatility
First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Simple Moving Average (50)
Timeframe: 1H

AND

First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (5)
Timeframe: 1H

🔴 SHORT STRATEGY (Primary Use)

ATR is equally effective for SHORT strategies by providing dynamic stop-losses, optimal position sizing, and volatility-based entry conditions for bearish market conditions.

Base Entry Order (SHORT)

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

AND

First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Simple Moving Average (50)
Timeframe: 1H

Additional Entry Orders (SHORT)

Additional Entry 1: Volatility expansion confirmation
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 0.02

AND

First Condition: Volume
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

OR

Additional Entry 2: Breakdown with volatility
First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Low Price
Timeframe: 1H

AND

First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (10)
Timeframe: 1H

Take Profit Orders (SHORT)

Rule 1: Exit condition - Volatility contraction (trend exhaustion)
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Cross Below
Second Condition: Simple Moving Average (20)
Timeframe: 1H

OR

Rule 2: Exit condition - ATR-based profit target
First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 0.97

OR

Rule 3: Exit condition - Oversold bounce warning
First Condition: RSI
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 30

AND

First Condition: Average True Range (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Simple Moving Average (10)
Timeframe: 1H

Stop Loss Orders (SHORT)

Rule 1: Stop loss - ATR-based adaptive stop
First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 1.025

OR

Rule 2: Stop loss - Volatility spike (risk management)
First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 0.08

OR

Rule 3: Stop loss - Trend reversal with volatility
First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (50)
Timeframe: 1H

AND

First Condition: Average True Range (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (5)
Timeframe: 1H

Advanced Strategy Combinations

Multi-Timeframe ATR Analysis

Setup

Higher Timeframe Confirmation:

• Daily: ATR trend direction and major volatility cycles

• 4H: ATR momentum and volatility patterns

• 1H: ATR execution signals and breakout confirmation

• 15M: Precise entry timing with volatility spikes

Execution

LONG Entry: Daily ATR rising + 4H ATR > MA(20) + 1H breakout with ATR expansion SHORT Entry: Daily ATR rising + 4H ATR > MA(20) + 1H breakdown with ATR expansion Stop Loss: ATR-based adaptive stops (2-3x ATR from entry)

Volatility-Based Strategy Selection

Setup Process:

1. Measure current ATR relative to historical average

2. High ATR (>1.5x average): Use trend-following strategies

3. Low ATR (<0.7x average): Use mean-reversion strategies

4. Expanding ATR: Prepare for breakouts/breakdowns

Execution:

• Base Order: ATR-based strategy selection

• Additional: Volatility confirmation with volume

• Take Profit: ATR-based profit targets (2-4x ATR)

• Stop Loss: ATR-based adaptive stops (1.5-2.5x ATR)

ATR Breakout Strategy

Bullish Breakout

Setup: Price approaches resistance with expanding ATR Signal: ATR expansion confirms breakout potential Entry: Price breaks resistance + ATR > MA(20) Target: ATR-based profit target (3x ATR from breakout)

Bearish Breakdown

Setup: Price approaches support with expanding ATR Signal: ATR expansion confirms breakdown potential Entry: Price breaks support + ATR > MA(20) Target: ATR-based profit target (3x ATR from breakdown)

Risk Management Guidelines

ATR-Based Position Sizing

ATR Level	Position Size	Risk Level
Low ATR (<0.5x avg)	Increased (125%)	Lower volatility
Normal ATR (0.5-1.5x avg)	Standard (100%)	Normal volatility
High ATR (1.5-2.5x avg)	Reduced (75%)	High volatility
Extreme ATR (>2.5x avg)	Minimal (25%)	Extreme volatility

ATR-Based Stop Loss Calculation

Conservative Stops

Formula: Entry ± (2.5 × ATR) Use Case: Low-risk strategies, ranging markets Example: Entry $100, ATR $2 → Stop at $95 (LONG) or $105 (SHORT)

Aggressive Stops

Formula: Entry ± (1.5 × ATR) Use Case: High-conviction trades, trending markets Example: Entry $100, ATR $2 → Stop at $97 (LONG) or $103 (SHORT)

ATR Reliability Factors

High Reliability

✅ ATR expansion with volume confirmation ✅ Clear volatility trends across timeframes ✅ ATR breakouts above historical averages ✅ Volatility patterns align with price action

Low Reliability

❌ ATR signals in extremely low volume periods ❌ Conflicting volatility signals across timeframes ❌ ATR without price action confirmation ❌ Artificial volatility spikes (news events)

Best Practices

For LONG Strategies

1. Volatility confirmation - Enter when ATR confirms trend strength

2. Adaptive stops - Use ATR multiples for dynamic stop-losses

3. Position sizing - Adjust size based on current ATR levels

4. Breakout timing - Use ATR expansion to confirm breakouts

For SHORT Strategies

1. Volatility confirmation - Enter when ATR confirms trend strength

2. Adaptive stops - Use ATR multiples for dynamic stop-losses

3. Position sizing - Adjust size based on current ATR levels

4. Breakdown timing - Use ATR expansion to confirm breakdowns

Common Mistakes to Avoid

• Fixed stops - Never use fixed stop-losses when ATR is available

• Ignoring volatility - Not adjusting position size based on ATR

• Wrong timeframe - Using ATR from inappropriate timeframe

• No confirmation - Trading ATR signals without price action confirmation

Market Conditions Analysis

Market Type	LONG Strategy Effectiveness	SHORT Strategy Effectiveness
Trending (High ATR)	🟢 High (trend following)	🟢 High (trend following)
Ranging (Low ATR)	🟡 Medium (mean reversion)	🟡 Medium (mean reversion)
Volatile (Expanding ATR)	🟢 High (breakout potential)	🟢 High (breakdown potential)
Quiet (Contracting ATR)	🔴 Low (await expansion)	🔴 Low (await expansion)
News Events	🔴 Low (artificial spikes)	🔴 Low (artificial spikes)

Related Indicators

Indicator	Relationship	Link
Normalized ATR	Percentage-based ATR	Normalized Average True Range
Bollinger Bands	Uses standard deviation	Bollinger Bands Upper
Standard Deviation	Alternative volatility measure	Standard Deviation
Volume	Confirms volatility moves	Volume

Conclusion

Average True Range is a fundamental volatility indicator that's essential for both LONG and SHORT strategies. Its primary value lies in risk management, position sizing, and strategy selection rather than directional signals.

Key Takeaways

• PRIMARY USE: Risk management and position sizing for all strategies

• SECONDARY USE: Volatility-based strategy selection and breakout confirmation

• ALWAYS: Adjust position sizes and stops based on current ATR levels

• REMEMBER: ATR measures volatility, not direction - combine with directional indicators

Success with Average True Range requires understanding that it's a risk management tool first and a trading signal second. Use it to adapt your strategies to current market volatility and protect your capital through proper position sizing and stop-loss placement.

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