Average True Range

Introduction to Average True Range (ATR) Indicator

Average True Range Technical Indicator (ATR) is an indicator that shows volatility of the market. It was introduced by Welles Wilder in his book New concepts in technical trading systems. This indicator has been used as a component of numerous other indicators and trading systems ever since.

Interpreting Average True Range

Average True Range can often reach a high value at the bottom of the market after a sheer fall in prices occasioned by panic selling. Low values of the indicator are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. Average True Range can be interpreted according to the same principles as other volatility indicators. The principle of forecasting based on this indicator can be worded the following way: the higher the value of the indicator, the higher the probability of a trend change; the lower the indicator’s value, the weaker the trend’s movement is.

Understanding True Range

True Range is the greatest of the following three values:

• the difference between the current maximum and minimum (high and low);
• the difference between the previous closing price and the current maximum;
• the difference between the previous closing price and the current minimum.

1.33001.34000.0010.0020.003

ATR 14 EURUSD · H1

ATR shows volatility in price units: it rises with large bars and falls during quiet periods.

Calculation of Average True Range

The True Range of a bar is the largest of three values, and ATR is the moving average of the True Range:

TR = MAX(HIGH(i) - LOW(i), ABS(HIGH(i) - CLOSE(i - 1)), ABS(LOW(i) - CLOSE(i - 1)))
ATR = SMA(TR, N)

Where:

• HIGH(i) and LOW(i) are the high and low of the current bar;
• CLOSE(i - 1) is the close of the previous bar;
• N is the indicator period (14 by default).

ATR is expressed in price units, not in pips. On EURUSD an ATR value of 0.0015 equals 15 pips; on USDJPY a value of 0.15 equals 15 pips.