Average True Range

The Average True Range Indicator (ATR) is another indicator developed by J. Welles Wilder, which aims to show the volatility of the market and individual instruments.

The Average True Range is an N-day Exponential Moving Average (EMA) of the true range values. Wilder used a 14-day but each trader can adapt the indicator based on his needs.

Calculation

The range of a day's trading is simply calculated as the highest price less the lowest price. The true range extends it to yesterday's closing price if it was outside of today's range.

The true range is the largest of the:
  • Most recent period's high less the most recent period's low (high – low)
  • Most recent period's high less the previous close (high – previous close)
  • Most recent period's low less the previous close (low – previous close)
Signals

ATR is not an indicator which aims to tell you in which direction an instrument is going to go or for how long. Instead it aims to determine the volatility of the instrument and can analyze the interest of traders.

An increasing range shows that traders are committing to buying or selling more. In contrast, the smaller the range the less interested traders are in the instruments.