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.