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Average True Range (ATR)

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Definition of 'Average True Range (ATR)'

The Average True Range (ATR) is a technical analysis volatility indicator developed by J. Welles Wilder.

It is important to note that because this is a volatility indicator it does not provide an indication of price trend but instead the degree of price volatility.

The average true range is an N-day exponential moving average of the true range values. Wilder recommended a 14-period smoothing.

Calculation

The range of a day's trading is simply high - low. The true range extends it to yesterday's closing price if it was outside of today's range.

TrueRange = Max(High, PreviousClose) - Min(Low, PreviousClose)

The true range is the largest of the:
  • Most recent period's high less the most recent period's low
  • Absolute value of the most recent period's high less the previous close
  • Absolute value of the most recent period's low less the previous close
The Theory

The idea behind ranges is that they show the commitment or enthusiasm of traders. Large and/or increasing ranges suggest that traders are prepared to continue to buy or sell a future throughout the course of the day. A decreasing range suggests falling interest.

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