The Average True Range ("ATR") is a measure of volatility. It was introduced by Welles Wilder in his book, New Concepts in Technical Trading Systems, and has since been used as a component of many indicators and trading systems.
Interpretation
Wilder has found that high ATR values often occur at market bottoms following a "panic" sell-off. Low Average True Range values are often found during extended sideways periods, such as those found at tops and after consolidation periods.
The Average True Range can be interpreted using the same techniques that are used with the other volatility indicators. Refer to the discussion on Standard Deviation for additional information on volatility interpretation.
Example
The following chart shows McDonald's and its Average True Range.
This is a good example of high volatility as prices bottom (points "A" and "A'") and low volatility as prices consolidate prior to a breakout (points "B" and "B'").
Calculation
The True Range indicator is the greatest of the following:
• The distance from today's high to today's low.
• The distance from yesterday's close to today's high.
• The distance from yesterday's close to today's low.
The Average True Range is a moving average (typically 14-days) of the True Ranges.
