The Average True Range Indicator ( ATR) was developed by J. Welles Wilder, who is credited with developing some of the most important technical indicators of all time including – The Relative strength Index RSI, the Average Directional Movement ADX indicators and Parabolic Time and the ATR is an other important Wilder technical volatility indicator which was introduced in his classic work – New Concepts in Technical Trading – Lets look at the indicator in more detail.

ATR stands for average true range, and is a volatility indicator.

Formula

True range is the largest of the three prices below: 

• The absolute difference of Today's High – Today's Low

• The absolute difference of Today's High – Yesterday's Close

• The absolute difference of Yesterday's Close – Today's Low

Average true range is when you take an average of the TR values over a certain period. Wilder was inclined to use a 14 period average, but his method for averaging is somewhat different from normal averaging methods.

True Range is therefore calculated as the greater of:

• High for the period less the Low for the period.

• High for the period less the Close for the previous period.

• Close for the previous period and the Low for the current period.

   

Basically, the Close for the previous period is substituted for the current Low, if lower, or for the current High, if higher. In conclusion - Average True Range is typically a 14 day exponential Moving average of True Range. Users should note, when setting time periods for Welles Wilder's indicators, he does not use the standard formula for exponential moving averages

Using the ATR

The ATR is not a directional indicator, like the Stochastic ADX or RSI. Instead, ATR is a unique volatility indicator that reflects the degree of interest or disinterest of traders in a price move.

Strong moves, in either direction, are often accompanied by large ranges, or large True Ranges. This is normally true at the beginning of a big move. Uninspiring moves can be accompanied by relatively narrow ranges.

The ATR can be used to validate the enthusiasm or interest of traders behind a price move and is particularly useful when trading breakouts from ranges. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.

Average True Range offers two basic warnings:

• High values warn of market tops and bottoms ( high volatility)

• Low values indicate ranging markets. (low volatility)

Final Words

this is a useful backup oscillator for traders in measuring trader interest in a currency movement and is particularly useful for breakout traders.