The Average True Range (ATR), developed by Welles Wilder, identifies periods of high and low volatility in the market. High volatility indicates a market with large price fluctuations, whereas low volatility signals a market that is in a trading range, with small price movements. Moreover, markets with high price fluctuation have a higher risk-to-reward ratio, as prices tend to rise and fall in a short period of time.
The formula for the ATR is:
The ATR is a lower technical study. ProSticks uses a default parameter value of 14 bars to calculate the ATR. 7 and 20 bars are also commonly used.
The ATR is a Moving Average of the True Range (TR) values over n periods of time. The TR is defined as the greatest of the following: 1) the distance between the period’s high and low, 2) the distance between the previous close and current high, and 3) the distance between the previous close and current low.
Technical Indicators Explained
