A stock that has moved 20 cents a day for a month moves $1.20 in one session. Nothing about that tells you where it goes next. It does tell you that the range you sized your last stop against no longer describes the instrument, and that is what the ATR volatility expansion strategy is built to catch.
What the ATR measures, and what it does not
J. Welles Wilder introduced the Average True Range in "New Concepts in Technical Trading Systems" in 1978. It measures volatility, and TradingView's reference is explicit about the limits: the ATR "is not used to indicate the direction of price. Rather, it is a metric used solely to measure volatility, especially volatility caused by price gaps or limit moves" (TradingView Help Center).
The same page is equally direct about forecasting: "it is not used as an active indicator to predict future moves. Instead, it is most useful in measuring the strength of a move."
Take that seriously, because it sets what this strategy can claim. An expanding ATR is a measurement of what just happened to the range. It is not a prediction that the move continues, which is why the rules below pair it with a directional condition.
The true range is the largest of three numbers. Those are the current high minus the current low, the high minus the previous close, and the low minus the previous close, the last two as absolute values. Gaps land inside the second and third of those, which is why a gap shows up in the ATR and not in a simple high-minus-low range.
The volatility expansion setup in rules
This article uses a 14-period ATR compared against its own 20-day average on daily bars. Those numbers are parameters. What matters is that you compare the current day's range against a stable baseline, and that you write down which baseline you used.
Condition 1: the day's true range is at least twice the 20-day ATR. On a stock whose 20-day ATR is $0.20, that means a true range of $0.40 or more. This is the expansion itself. Note the shape of the comparison: one day against an average of twenty, not one average against another.
Condition 2: the close is above the highest close of the past 20 days. Expansion with no direction is a wide range that closes mid-bar. The breakout condition is what makes the trade a long.
Condition 3: volume is at least 50% above its 20-day average. The threshold is a choice, and it describes turnover only. Nothing in a volume figure identifies who traded.
All three conditions apply to the same session, and the entry is at that session's close.
Exits and the stop that follows the new range
There are two exits, and the stop is sized from the range as it stands now.
Exit 1: the ATR falls back to its 20-day average. The rule that got you in was an expanded range, so the rule that takes you out is the range returning to normal. This exit fires on the volatility measure rather than the price. It can close a trade that is still in profit.
Exit 2: the stop. Size the stop against the range as it is now, not as it was before the expansion. At 1.5 times the signal day's true range, a $1.20 true range puts the stop $1.80 below the entry.
Using the pre-breakout ATR here is the common error. A $0.20 ATR would put the stop $0.30 below the entry, which is a quarter of one current day's movement. The trade would close on ordinary noise before any of the other rules got a turn.
Risk and the size that comes out of it
Risk 1.5% of a $50,000 account and the loss at the stop is $750. Divide by the stop distance for the share count: at $1.80 per share, $750 / $1.80 = 416 shares.
This strategy uses a target of 2.5R. At $1.80 of risk that is $4.50 per share above the entry. Breakeven win rate at 2.5:1 is 1 / (1 + 2.5) = 28.6%.
The wider stop that the expanded range demands cuts your share count, which is the mechanism working as intended. Same dollar risk, fewer shares, more room.
A hypothetical worked example
No real company is named here. The numbers are chosen so you can check every line.
A stock trades between $10.00 and $10.50 for a month. Its 20-day ATR is $0.20 and yesterday's close was $10.40. Today it opens at $10.75 on a production update, trades between $10.70 and $11.60, and closes at $11.50 on three times its 20-day average volume.
- True range: the largest of $11.60 - $10.70 = $0.90, $11.60 - $10.40 = $1.20, and $10.70 - $10.40 = $0.30. So $1.20.
- Expansion check: $1.20 / $0.20 = 6 times the 20-day ATR, past the 2x trigger.
- Breakout check: $11.50 closes above the 20-day high of $10.50.
- Entry $11.50. Stop at 1.5 x $1.20 = $1.80 below, so $9.70.
- Size: $750 / $1.80 = 416 shares, costing 416 x $11.50 = $4,784.
- Target at 2.5R: $11.50 + 2.5 x $1.80 = $16.00.
If the ATR settles back toward $0.20 while the price sits at $13.30, exit 1 closes the trade there: $13.30 - $11.50 = $1.80, which is exactly 1R. A rule that exits on volatility rather than price will often finish short of the target. That is the trade you chose when you wrote the rule.
Where volatility expansion trades fail
Entering late. The trigger is the first session where the range expands past your threshold. Four sessions later, the range is wide, the stop distance is wide, and the same 2.5R target sits much further away.
Sizing off the old ATR. Covered above, and it is the failure that turns a sound entry into a stop-out on the second day.
Ignoring the index. A single stock's expansion against a falling index is a different trade from the same expansion in a rising one. Check the index the stock belongs to, on whichever exchange it trades.
Assuming expansion means direction. A range can expand while the price ends the session where it started. Condition 2 exists for that case.
Tracking these trades in Swingfolio
The Strategy Library holds a template called "ATR Volatility Expansion", tagged Volatility and Advanced, with 3 entry rules and 2 exit rules. Hover a row and press Preview to see them numbered under Entry Rules (3) and Exit Rules (2), with a Risk Management block reading Stop Loss 5%, Target R-Multiple 2.5R and Position Size 1.5%. The Risk Management block sets the stop as 5%, while the second exit rule reads "Price hits stop loss (1.5 ATR)". Decide which of the two you run, set it after importing, and record which version you traded.
Two things are worth recording per trade. The first is the stop distance you used as a multiple of the signal day's range, because that is the variable this strategy turns on. The second is the gap you held through. On a trade's Market tab, the Overnight Gaps panel shows a card for the entry day. Below it, the holding-period gaps are counted as favorable, adverse and flat for the direction you held. Expansion entries are often made the day after news, so these counts are the record of what the next open did to you.
Then read the R-Multiple Distribution on the strategy page. A column of small negative R-multiples says the stop was too tight for the range you entered on, and that is a sizing question rather than a signal question.
Set your next expansion entry's stop from the signal day's true range, write both numbers in the trade, and compare 20 of them before changing the multiple. Start the 30-day trial to keep those records together.