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Average True Range ATR

 

Average True Range ATR Purpose


Average True Range (ATR) is a Forex indicator developed by Welles Wilder that introduced in his book, “New Concepts in Technical Trading Systems” 1978. This indicator measures volatility based on price action during a certain period. A higher ATR indicates a high level of volatility and a low ATR - low level of volatility. ATR was developed mainly for commodities markets to evaluate daily price instability. These markets are more likely to have price gaps or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is obligatory to take into consideration that ATR does not provide an indication of price direction, just volatility.


Average True Range Usage


Average True Range is based on an affecting average of true ranges, characteristically for 14 periods with daily and longer timeframes. The ATR reflects the volatility values that are in relation to the trading instrument's price. True range (TR) is the largest of:

  • Current high minus the current low
  • Current high minus previous close
  • Current low minus previous close



Average True Range ATR Calculation


It is important to remember that Average True Range is not designed to predict the direction of the market. ATR helps traders judge the “true” volatility in prices. So the calculation method is:


Current ATR = [(Prior ATR × 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

In addition, the traders can use the Average True Range to confirm the strength of a price reversal or breakout.

 

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