The Average True Range (ATR) indicator is a technical analysis tool used to measure market volatility. Developed by J. Welles Wilder, ATR provides information about the range of price movements or price volatility over a specific period of time. It is commonly used by traders and investors to determine potential entry or exit points for trades.
ATR calculates the average range between high and low prices for each candlestick or trading period, taking into account any gaps that may occur. It typically uses a 14-day period, but the user can adjust the time frame based on their preferences. The calculation involves taking the true range for each period (the highest of the following: current high minus current low, absolute value of current high minus previous close, or absolute value of current low minus previous close) and then averaging these true ranges over the specified period.
The ATR value is represented as an absolute price or a percentage of the stock's price, indicating the average volatility in either dollar or percentage terms. A higher ATR suggests greater volatility, while a lower ATR indicates lower volatility. Traders might use ATR to set stop-loss or take-profit levels, as well as to determine the position size or risk associated with a trade.