Average True Range (ATR) is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities. The indicator does not provide an indication of price trend, simply the degree of price volatility. The average true range is an N-day exponential moving average of the true range values. Wilder recommended a 14-period smoothing.
The range of a day’s trading is simply . The true range extends it to yesterday’s closing price if it was outside of today’s range.
The true range is the largest of the:
- Most recent period’s high less the most recent period’s low
- Absolute value of the most recent period’s high less the previous close
- Absolute value of the most recent period’s low less the previous close
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.