Education / Indicators / Average True Range
Average True Range (ATR) is a technical analysis indicator developed by J. Welles Wilder, based on trading ranges smoothed by an N-day exponential moving average.
The idea of ranges is that they show the commitment or enthusiasm of traders. Large or increasing ranges suggest traders prepared to continue to bid up or sell down a stock through the course of the day. Decreasing range suggests waning interest.
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.
Many traders use the average true range for setting their stop losses. The reason is that the average true range is a fantastic measure of volatility and market noise. Very simply, the average true range determines a security's volatility over a given period. That is, the tendency of a security to move, in either direction.
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