An average true range value is the average price range of an investment over a period. So if the ATR for an asset is $1.18, its price has an average range of movement of $1.18 per trading day.
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What Is the Average True Range (ATR)?
The average true range (ATR) is a technical analysis indicator introduced by market technician J. Welles Wilder Jr. in his book New Concepts in Technical Trading Systems that measures market volatility by decomposing the entire range of an asset price for that period.1 The true range indicator is taken as the greatest of the following: current high…
Limitations of the ATR
There are two main limitations to using the ATR indicator. The first is that ATR is a subjective measure, meaning that it is open to interpretation. No single ATR value will tell you with any certainty that a trend is about to reverse or not. Instead, ATR readings should always be compared against earlier readings to get…
How to Calculate the ATR
The first step in calculating ATR is to find a series of true range values for a security. The price range of an asset for a given trading day is its high minus its low. To find an asset’s true range value, you first determine the three terms from the formula. Suppose that XYZ’s stock…
The Bottom Line
The average true range is an indicator of the price volatility of an asset. It is best used to determine how much an investment’s price has been moving in the period being evaluated rather than an indication of a trend. Calculating an investment’s ATR is relatively straightforward, only requiring you to use price data for…
Example of How to Use the ATR
As a hypothetical example, assume the first value of a five-day ATR is calculated at 1.41, and the sixth day has a true range of 1.09. The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one and then adding the true range for…
The Average True Range (ATR) Formula
The formula to calculate ATR for an investment with a previous ATR calculation is : \begin{aligned}&\frac{ \text{Previous ATR} ( n – 1 ) + \text{TR} }{ n } \\&\textbf{where:} \\&n = \text{Number of periods} \\&\text{TR} = \text{True range} \\\end{aligned}nPrevious ATR(n−1)+TRwhere:n=Number of periodsTR=True range If there is not a previous ATR calculated, you must use: \begin{aligned}&\Big ( \frac{ 1 }{…