What is Average True Range (ATR) and how is it calculated?

Average True Range (ATR) is a technical analysis indicator used to measure market volatility. It was developed by J. Welles Wilder Jr. and introduced in his 1978 book, “New Concepts in Technical Trading Systems.”

ATR calculates the average true range of price movement over a specified period of time, typically 14 days, although other timeframes can also be used. The true range is defined as the greatest of the following:

  1. The distance between the current high and the current low.
  2. The distance between the previous close and the current high.
  3. The distance between the previous close and the current low.

To calculate the ATR, the true range values are averaged over the specified period of time. This provides a measure of the average volatility of the market over that time period.

ATR can be used in a variety of ways, such as to set stop-loss orders or to identify potential trend reversals. The higher the ATR, the more volatile the market is considered to be, and the more caution traders should exercise. Conversely, a lower ATR suggests lower volatility and a more stable market.