ATR is an indicator that shows the average of true ranges over a specific period. This technical indicator reveals information on the volatility of a stock. Developed by J. Welles Wilder, the Average True Range helps traders set their exit strategy and determine the best time for trading. 

In This Article

• What is the Average True Range? 

• How To Analyse Chart Using the Average True Range 

Category 

Volatility 

Type 

Lagging 

What is the Average True Range? 

The Average True Range is a technical analysis indicator that calculates price or market volatility. It helps traders analyse the volatility involved in price changes of securities to select the ideal time for achieving consistency in trading. 

An ATR calculation is based on 14 periods mostly. These can be monthly, weekly, daily, or intraday. In order to measure long-term volatility, traders use 20-50 periods. Conversely, shorter averages (2-10 periods) are used to measure recent volatility. The Average True Range also takes the gaps in the movement of price into account. 

Current Average True Range = [Prior Average True Range * 13 + Current True Range] / 14

How To Analyse Chart Using the Average True Range 

ATR is exceedingly helpful for entry or stops triggers that signal alterations in volatility. This indicator adapts to sharp price moves or consolidation areas that trigger an abnormal price in either direction. 

If the ATR is expanding on a chart, it implies enhancing volatility in the market. As the Average True Range is non-directional, an expanding range may show either a short sale or a long buy. 

A sharp rise or decline leads to high ATR values. That said, these high values aren’t maintained for long. Conversely, a low ATR indicates a series of quiet days or small ranges. Thus, a lower Average True Range suggests lower price volatility.  

A continuous period of low ATR may indicate the possibility of a continuation move or reversal.