How to Use Average True Range (ATR) in Futures Trading Analysis

When it comes to building a solid futures trading strategy, understanding market volatility is key. One of the most widely used technical indicators to gauge volatility is the average true range (ATR). Originally developed by J. Welles Wilder, ATR helps traders measure the degree of price movement over a given period without factoring in price direction. 

Whether you're looking to fine-tune your entry and exit strategies or manage risk more effectively, average true range can be a valuable tool in your trading toolkit.

What Is Average True Range?

At its core, ATR is a volatility indicator that reflects the average true range (true high to true low) of the price bars on a chart at a specific bar interval. Unlike trend or momentum indicators that signal trend direction and reversals, ATR is solely focused on how much an asset is moving, making it essential in volatile markets like futures.

ATR is typically calculated using the following steps:

1. True range (TR) is determined as the greatest of: 
   • Current high minus current low 
   • Absolute value of current high minus previous close 
   • Absolute value of current low minus previous close 
2. Then the ATR for each bar is averaged over some number of bars—usually 8, 14, or 34 bars—for the final ATR indicator value for each bar.

The resulting ATR value helps you understand how much a market has been moving on average for that bar interval and time frame.

Figure 1: Average true range (ATR) displayed as a line graph beneath a futures price chart in NinjaTrader, showing how ATR measures market volatility.

Why Average True Range Matters for Futures Traders

Futures markets are known for their dynamic price action and leverage, which can amplify both opportunities and risks. This is where the average true range can make a difference:

• Opposite correlation: Although not a tool specifically designed for identifying market direction, often prices are oppositely correlated to the direction or trend of the ATR indicator. 
• Position sizing: Traders often use ATR to adjust their position size relative to market volatility, as higher volatility often requires taking higher risks. 
• Stop-loss placement: ATR-based stop-losses can help you avoid getting stopped out too soon by normal market "noise" in a high-volatility environment. 
• Breakout confirmation: A spike in ATR can signal a potential breakout, indicating that price is starting to move with greater conviction.

How to Apply ATR in Your Futures Trading Strategy

Here are a few common ways futures traders integrate ATR into their technical analysis:

1. Setting Dynamic Stop-Losses

Using a fixed stop-loss in volatile markets often results in being stopped out. Instead, traders will set dynamic or trailing stops based on the current ATR value—for example, 1.5x the current ATR below the entry point for long trades. This approach tailors your stop to the current market conditions.

Figure 2: Using the ATR based Keltner Channel indicator to track a dynamic trailing stop that adapts to market volatility.

2. Filtering Breakout Trades 

Pairing ATR with support/resistance levels or chart patterns can help confirm a valid breakout. If ATR increases during a breakout, it may indicate that the move has strength behind it. 

3. Adjusting Trade Size 

When volatility is high (and ATR is elevated), you might reduce your position size to account for greater stop-loss risk. Conversely, in lower volatility environments, normal position sizing may be more appropriate, depending on your risk tolerance. 

4. Identifying Shifts in Market Conditions 

Sudden increases or decreases in ATR can alert you to changing market dynamics. A rising ATR suggests increased uncertainty or interest in a particular futures contract, while a declining ATR may indicate consolidation or reduced interest.

Combine ATR With Other Indicators 

ATR works best as part of a broader technical strategy. Many futures traders use ATR alongside trend-following indicators like moving averages or momentum tools like the relative strength index (RSI). Together, these indicators can offer a fuller picture of both trend direction and volatility. 

Start Using ATR in Your Futures Trading 

If you’re not already using average true range in your futures analysis, it’s worth exploring. Whether you're trading crude oil, equity index futures, or metals, ATR can help you better understand market behavior and adapt your strategy accordingly. 

When using the ATR indicator, look for rising and falling values, and use the Kelter Channels indicator (based on ATR) to track oversold and overbought market conditions. 

NinjaTrader’s award-winning platform offers built-in support for ATR and other powerful technical indicators. Customize your charts, build automated strategies, and manage your risk more effectively—all from one powerful interface.