Average True Range (ATR): The Volatility Tool Every Aussie Investor Should Know

Market volatility is a fact of life for Australian investors, but mastering it can be a game-changer. The Average True Range (ATR) is a key tool for measuring volatility, and understanding how it works could be your edge in 2025’s dynamic financial landscape.

What Is Average True Range (ATR) and Why Does It Matter?

Originally developed by legendary technical analyst J. Welles Wilder Jr., the ATR is a technical indicator designed to capture the degree of price movement (volatility) in a financial instrument over a set period. Rather than predicting direction, ATR shows how much an asset typically moves — vital information for setting stop-losses, position sizing, and gauging risk in both share trading and forex.

For Australian investors in 2025, ATR is especially relevant as domestic and global markets face heightened uncertainty due to interest rate shifts, geopolitical events, and rapid sector rotations. With the ASX seeing higher day-to-day swings, understanding ATR equips traders with a more disciplined approach to risk.

How Is ATR Calculated? Real-World Example

ATR is calculated as a moving average of the ‘true range’ over a specified period (commonly 14 days). True range is the greatest of:

• Current high minus current low

• Absolute value of current high minus previous close

• Absolute value of current low minus previous close

The result: a single number reflecting the typical daily movement, regardless of whether prices are trending up or down.

Example: Suppose BHP shares have the following ranges over the past 14 days, producing an ATR of $1.15. If today’s closing price is $45.50, a 1 ATR move would mean BHP could swing between $44.35 and $46.65 in a typical session. This gives context for placing stop-losses or identifying when a move is truly extraordinary.

ATR in Action: Trading Strategies for 2025

ATR isn’t just for chart-watchers. Here’s how smart Australian investors are using it in 2025:

• Setting Dynamic Stop-Losses: Instead of a fixed dollar value, traders set stop-losses at 1x or 1.5x ATR below entry. This adapts risk management to current volatility, reducing the chance of being ‘stopped out’ by routine price noise.

• Position Sizing: ATR helps determine how many shares or contracts to buy, so your risk per trade stays constant even as volatility changes.

• Identifying Breakouts: A sudden surge in ATR can signal that a market is breaking out of a consolidation phase — a cue to pay attention, especially during earnings season or after major RBA announcements.

2025 Policy Update: With ASIC tightening guidelines around retail trading risk disclosures, brokers are now required to display volatility metrics like ATR more prominently on their platforms. This empowers everyday traders to make more informed decisions and manage risk more transparently.

Limitations and Best Practices

ATR is powerful, but it’s not a crystal ball. It won’t tell you which way prices will go — only how far they’re likely to move. Wise investors combine ATR with trend analysis, fundamental research, and macroeconomic awareness.

Some best practices for 2025:

• Review ATR on both daily and weekly charts for a complete view.

• Be aware of major market events (e.g., RBA rate decisions, federal budget announcements) that can temporarily inflate ATR readings.

• Backtest your trading plan using historical ATR data to avoid overfitting to recent market extremes.

Conclusion: Harness ATR for Smarter, Safer Trades

In a world where volatility is the new normal, tools like Average True Range help Australian investors navigate uncertainty with discipline and confidence. Whether you’re a seasoned trader or just starting out, integrating ATR into your process can lead to more consistent, risk-aware decisions — and ultimately, better outcomes in 2025’s ever-shifting markets.