Average True Range (ATR): Formula, Interpretation, and Usage in Technical Analysis

Comprehensive guide on Average True Range (ATR): Understanding the formula, its significance, and practical applications in technical analysis for assessing market volatility.

The Average True Range (ATR) is a technical analysis indicator developed by J. Welles Wilder Jr. to measure market volatility. It is derived from the average of the true ranges over a specified period, typically 14 days.

The Formula for Calculating ATR§

The ATR is calculated using the following steps:

1. Find the True Range (TR) for each period, which is the maximum of:

   • $\text{Current High} - \text{Current Low}$
   • $|\text{Current High} - \text{Previous Close}|$
   • $|\text{Current Low} - \text{Previous Close}|$

   Mathematically:

   $$TR_t = \max(H_t - L_t, |H_t - C_{t-1}|, |L_t - C_{t-1}|)$$

2. Compute the ATR as the moving average of the true range over the desired period $N$:

   $$ATR_t = \frac{\sum_{i=0}^{N-1} TR_{t-i}}{N}$$

Historical Context of ATR§

Practical Applications of ATR§

Using ATR to Set Stop-Loss Orders§

Identifying Market Conditions with ATR§

Examples of ATR in Use§

Example 1: High Volatility Scenario§

Example 2: Low Volatility Scenario§

Frequently Asked Questions about ATR§

How is ATR different from standard deviation?§

What role does ATR play in risk management?§

References§