Average true range (ATR)
Introduced by Welles Wilder in his book, New Concepts in Technical Trading Systems, Average True Range (ATR) measures security's volatility, but gives no indication of price direction or duration.
How it is calculated
Wilder started with a concept called True Range(TR). TR is the greatest of the following:
If the current high/low range is large, chances are it will be used as the TR. If the current high/low range is small, it is likely that one of the other two methods would be used to calculate the TR. To ensure positive numbers, absolute values are applied to differences.
ATR is a simple MA (typically 14 days) of TR.
How to interpret
ATR shows volatility of a stock. Wilder found that high ATR values often occur at market bottoms following a "panic" sell-off. Low ATR values are often found during extended sideways periods, such as those found at tops and after consolidation periods (Achelis 1995).
On 18 April 2005, UniFiber's price declined from a previous closing price of $0.51 to a closing price of $0.235. This resulted in high ATR readings. Extreme readings (both high and low) can mark turning points or the beginning of a move. However, ATR cannot predict direction or duration, simply activity levels. Notice that for UniFiber, its high ATR marked a turning point because prices were quickly trending up following the sharp price decline.
- Achelis, S. B., Technical Analysis from A to Z, 1995