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Average True Range

Introduced by Welles Wilder in his book "New Concepts in Technical Trading Systems" (1978), the Average True Range (ATR) is a measure of a trading instrument's volatility. It measures the degree of price movement, not the direction or duration of the price movement. The True Range is first calculated using the is the greatest of the following:

  • Difference between the current high and the current low
  • Difference between the previous closing price and the current high
  • Difference between the previous closing price and the current low

The Average True Range is then formulated by adding smoothing to the True Range. The True Range can be smoothed using a variety of techniques to create the final Average True Range indicator. However, the two most common smoothing methods used to calculate the ATR are Wilders Smoothing or a simple moving average smoothing.

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Interpretation

Wilder stated that high ATR values often indicated market bottoms after a sell-off, while low ATR values typically indicated extended periods of sideways price movement (such as those found at tops and after consolidation periods). The Average True Range can be interpreted using the same techniques that are used with the other volatility indicators.

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