Average True Range (ATR) is a technical analysis indicator used to measure the volatility of an asset’s price movement. Developed by J. Welles Wilder, ATR calculates the average price range of an asset over a specific time period, taking into account gaps in price between periods. The indicator is often used by traders and investors to determine potential price trends and to set stop-loss orders.
ATR is calculated by taking the average of the True Range (TR) over a certain number of periods. True Range is the greatest of three values: the difference between the current high and low, the difference between the previous close and the current high, or the difference between the previous close and the current low. The resulting value is a measure of the asset’s volatility and can be used to determine the level of risk associated with trading that asset. A higher ATR value indicates higher volatility, while a lower ATR value indicates lower volatility. Traders can use this information to adjust their trading strategies accordingly, such as using wider stop-loss orders in higher volatility markets.