Average True Range
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
True Range is the greatest of the following three values:
- difference between the current maximum and minimum (high and low);
- difference between the previous closing price and the current
maximum;
- difference between the previous closing price and the current
minimum.
The indicator of Average True Range is a moving average
of values of the
true range.