Business, Legal & Accounting Glossary
The Average True Range (ATR) measures stock price volatility. As the volatility (as measured by differences between high, low, and closing prices) of the stock increases, this indicator will increase. Lower volatility will be reflected by smaller values of the indicator. The ATR was originally introduced by Welles Wilder and is used by many trading systems and technical analysis indicators.
The Average True Range is a moving average of the True Range. The ATR provides a measure of the average price swing over a given number of bars, taking into account the gaps between the close and next open of consecutive bars.
Unusually high volatility goes hand-in-hand with high risk. The problem with ATR and other volatility indicators is that there is no upper limit, making it difficult to establish when the volatility has reached an extreme. The Average True Range should always be used in conjunction with other indicators or timing methods.
The indicator is typically used with a 14 period moving average. High Average True Range values often occur following a “panic” sell-off, representing a potential market bottom. Low Average True Range values tend to be found at market tops and during periods of sideways movement/consolidation.
The Average True Range can be interpreted using the same techniques used with other volatility indicators such as Standard Deviation.
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This glossary post was last updated: 25th March, 2020 | 2 Views.