Average True Range (ATR) Definition
What is Average True Range?
Initially developed by J. Welles Wilder Jr., the Average True Range or ATR is an indicator that measures market volatility.
This technical analysis indicator works by deriving the entire range of an asset for a set period.
The average true range indicator is created by averaging the following true ranges:
- Current high less the current low
- The absolute value of the current high less the previous close
- The absolute value of the current low less the previous close
The Average True Range is, therefore, a moving average of the true ranges usually over about fourteen days.
History of ATR
Wilder developed the ATR with commodities in mind.
Commodities are usually more volatile than stocks and were subject to limit moves and gaps.
So, a volatility formula based solely on the high-low range would fail to capture the totality of the commodity’s volatility.
Thus, the ATR was created to fill in the missing pieces.
It is important to remember that ATR does not indicate price, only volatility.
ATR is an excellent tool for tracking volatility, which is an important variable when investing or charting.
If you’re trying to gauge the overall strength of a move or trying to discover a new trading range, then ATR is the tool for you.
However, with that said, ATR is best used as a compliment rather than on its own.
Adding ATR to other price direction driven indicators should add some confidence to your moves and benefit your investments and trades.