The Average True Range (ATR) shows the degree of volatility in the market. It was first introduced by Welles Wilder in his book “New Concepts in Technical Trading Systems”. It’s used widely in trading systems and is the basis of several other technical indicators.
The ATR often reaches a high when the market reaches a bottom after a steep decline due to panic selling. It reaches lows during long periods of sideways movement at the top of the market, and during market consolidation.
The ATR can be interpreted in the same way as other volatility indicators:
- A high value indicates that a trend change is likely
- A low value indicates that a trend is weak
The ATR for a period is the greatest of three values: the difference between the current high and low, the difference between the previous close and the current maximum, and the difference between the previous close and the current minimum.
DIFF1 = ABS ( HIGH( J ) – LOW ( J ) )
DIFF2 = ABS ( CLOSE( J – 1 ) – HIGH( J ) )
DIFF3 = ABS ( CLOSE( J – 1 ) – HIGH( J ) )
ATR = MAX( DIFF1, DIFF2, DIFF3 )
ABS is an absolute value – negative numbers are changed to positive numbers
J is the current interval