The Average True Range (ATR) is a technical indicator employed in stock trading to measure market volatility. Calculated as the moving average of the True Range - the greatest of the current high minus the low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close - the ATR provides insight into the extent of price fluctuations. Traders commonly use the ATR for setting stop-loss levels and determining position sizes. Higher ATR values indicate increased volatility, prompting some traders to favor stocks with larger ATR for potentially more significant price movements. Additionally, ATR can assist in identifying trend strength, confirming breakouts, and adjusting risk parameters based on prevailing market conditions.
Average True Range (ATR) - Technical Analysis from A to Z
The Average True Range (ATR) is a measure of volatility. Welles Wilder introduced it in his book New Concepts in Technical Trading Systems, and it has since been used as a component of many indicators and trading systems. Wilder has found that high ATR values often occur at market bottoms following a "panic" sell-off. Low Average True Range values are often found during extended sideways periods, such as those at tops and after consolidation periods.
Average True Range (ATR) - Technical Analysis from A to Z