# Indicator Help

 Indicator Index * Members Only

### Average True Range (ATR)

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Average True Range Technical Indicator (ATR) is an indicator that shows volatility of the market. It was introduced by Welles Wilder in his book "New concepts in technical trading systems". This indicator has been used as a component of numerous other indicators and trading systems ever since.

Average True Range can often reach a high value at the bottom of the market after a sheer fall in prices occasioned by panic selling. Low values of the indicator are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. Average True Range can be interpreted according to the same principles as other volatility indicators. The principle of forecasting based on this indicator can be worded the following way: the higher the value of the indicator, the higher the probability of a trend change; the lower the indicator’s value, the weaker the trend’s movement is.

Calculation

1. TRt = MAX (|Ht - Lt|,|Ht - Ct-1|,|Lt - Ct-1|)

2. Initial (chronological) value:

ATR
t = (TRt + TRt-1 + ... TRt-n+1) / n

Accumulative (subsequent) values:

ATR
t = ((n-1) * ATRt-1 + TRt) / n

Parameter

• Period (14) - The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. Wilder used a period of 7. Other common periods used are 14 and 20.

Interpretation

Welles Wilder developed Average True Range to create a tool for a precise and realistic calculation of market’s price activity. This value is considered when calculating the directional movement of a market. Mr. Wilder defined the True Range to be the greatest for the following periods:

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.

True Range measures market volatility and is an integral part of indicators such as ADX (Average Directional Movement) or ADXR (Average Directional Movement Rating), and several others, to identify the directional movement of a market. The ATR is the basic unit of measurement for Wilder's Volatility System.

The Average True Range indicator identifies periods of high and low volatility in a market. High volatility describes a market with ongoing price fluctuation, whereas low volatility is used to label a market with little price activity. Measuring market volatility can help in identifying buy and sell signals and, additionally, risk potential. Markets with high price fluctuation offer more risk/reward potential, because prices rise and fall in a short time, giving the investor the opportunity to buy or sell at, supposedly, the right moment.

When a market becomes increasingly volatile, the ATR tends to peak rising in value, and during periods of little volatility, the ATR bottoms out decreasing in value. A market will usually keep the direction of the initial price move, though this is certainly not a rule. Analysts, therefore, tend to use Average True Range to measure market volatility and other technical indicators to help identify market direction.

Markets: Currencies  •   Energies  •   Financials  •   Grains  •   Indices  •   Meats  •   Metals  •   Softs

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