ATR

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this “missing” volatility. It is important to remember that ATR does not provide an indication of price direction.

True Range

Wilder started with a concept called True Range (TR), which is defined as the greatest of the following:

Method 1: Current High less the current Low

Method 2: Current High less the previous Close (absolute value)

Method 3: Current Low less the previous Close (absolute value)

Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. 

 Calculation             

Current ATR = [(Prior ATR x 13) + Current TR] / 14

  - Multiply the previous 14-day ATR by 13.

  - Add the most recent day's TR value.

  - Divide the total by 14

ATR is based on the True Range, which uses absolute price changes. As such, ATR reflects volatility as absolute level. In other words, ATR is not shown as a percentage of the current close. This means low-priced stocks will have lower ATR values than high price stocks

ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.