# Average true range (ATR)

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Keymaster

Developed by Veles J. Wilder and presented in his book “New Concepts in Technical Trading Systems ” (1978), the Average True Range (ATR) indicator measures the volatility of a market instrument. Thus, the indicator does not provide indicators of the direction of the price movement or its duration, but simply the degree of price movement or volatility.

Like most of its indicators, Wilder developed ATR , relying on commodity markets and daily prices. In 1978 prices for commodity contracts were often more volatile than share prices. However, to date, many market instruments, especially currencies, are subject to much greater volatility. In addition, prices for commodity contracts were often (and remain) prone to gaps and limited movements. Limited movements occur when a market instrument opens up or down from its maximum and is not traded again until the next session. The resulting bar or candle is obtained in the form of a simple small line. To better reflect the volatility associated with such market instruments, Wilder sought to take into account gaps, limited movements and a narrow range of maximum / minimum in his calculations. A variance formula based only on the high / low range would not be able to cover actual variability,

Wilder began with a concept called the True Range (TR), which is defined as the largest of the following:

• Current maximum minus the current minimum.
• The absolute value of the result: the current maximum minus the previous close.
• The absolute value of the result: the current minimum minus the previous close.

If the current maximum / minimum range is the largest, then it will be used as the True Range (TR) . If the current maximum / minimum range is small, then, probably, one of the other two methods will be used to calculate the True Range . The last two options usually arise when the previous close is greater than the current high (signaling a potential gap down and / or limited movement) or the previous close is lower than the current low (signaling a potential GAP up and / or limited movement). To guarantee positive numbers, absolute values from the difference are taken.

The example above shows three potential situations when the True range will not be based on the current maximum / minimum range. Note that all three examples have a small range of maximum / minimum and two examples show a significant gap.

• A small range of high / low formed after the gap up. The true range was found by calculating the absolute value of the difference between the current maximum and the previous close.
• A small range of high / low was formed after the gap was down. The true range was found by calculating the absolute value of the difference between the current minimum and the previous close.
• Even though the current close is within the previous high / low range, the current maximum / minimum range is very small. In fact, it is less than the absolute value of the difference between the current high and the previous close, which is used to estimate the True range.

Typically, the Average True Range (ATR) is based on 14 periods and can be calculated based on intra-day, daily, weekly or monthly data. For this example, the Average True Range (ATR) will be calculated based on the daily data. Since there must be a beginning, the first value of the True Range (TR) in a number of values ??is taken simply as a maximum minus the minimum, and the first 14-day Average True Range (ATR) is found by averaging the daytime ATR values over the past 14 days. After that, Wilder tried to smooth out the data set, including the Mean True Range (ATR) values for the previous period. The second and subsequent values ??of the 14-day ATR will be calculated as follows:

1. The previous value of the 14-day Average True Range (ATR) is multiplied by 13.

2. The value of the True Range (TR) of the most recent day is added to the result obtained.

3. The value obtained is divided by 14.

In the above table, the first true range value (TR) is calculated as a maximum minus the minimum and is equal to 1.9688. The first value of the 14-day Average True Range (ATR) was calculated as the average of the first 14 True Range values (TR) and is equal to 3.6646. The second value of the Average True Range (ATR) starts the smoothing process using the previous value.

The graph above corresponds to the calculations given in the table for “Sun Microsystems” for the period from October 23, 2000. to December 7, 2000.

• Day 15: ((3.6646 × 13) + 4.3437) / 14 = 3.7131
• Day 16: ((3.7131 × 13) + 4.2812) / 14 = 3.7536

For those who want to try to make calculations on their own, a few important notes are given below.

• There is always a beginning, and the first calculations may not exactly match the formula. The first value of the True range (TR) is simply the maximum minus the minimum, and the first value of the Average True Range (ATR) is simply the average of the first 14 TR values .
• Secondly, many indicators include the smoothing process. In this example, the Average True Range (ATR) of the previous period is used to form the current ATR .
• The above example contains only a small part of the general available price data. The amount of data used will affect the final result. Although the difference is unlikely to be significant, a 33 day data set will give a different value for the Average True Range (ATR) than the set of data used for 500 days.
• If you want to copy this formula, first try and duplicate the example given, using the same data for opening, maximum, minimum and closing. Once your formula provides a result that matches the example, you can use the formula for your data.
• Due to rounding up the values to decimal places, getting the exact value becomes impossible. Also, discrepancies in the data for the opening, maximum, minimum and closure can be obtained different values of the indicator.

Example of Average true range (ATR)

The “IBM” chart below shows an example of a 14-day Average True Range (ATR) in action. Extreme levels (maximum and minimum) can mark turning points or the beginning of the movement. Being an indicator based on variability like the Bollinger Bands, the indicator of the Average True Range (ATR) can not predict the direction of travel or its duration, but simply shows the activity levels. Low levels indicate low trading activity (small ranges), and high levels indicate strong trading activity (large ranges). A long period of low values ??of the Average True Range (ATR) may indicate consolidation and the beginning of a continuation or reversal movement. High valuesATRs are usually the result of a sharp increase or decrease and are unlikely to be sustained for a long period.

## Application in graphics programs

Using graphic programs, the Average True Range (ATR) can be set on the chart as an indicator above or below the price chart of the market instrument. The only necessary variable is the number of periods, and the first option on the right can be used to make changes. As the default setting, 14 periods are used, and the indicator can be applied on intraday, daily, weekly or monthly charts.

### Note

Since the Average True Range (ATR) shows volatility as an absolute level, market instruments with a lower price will have lower levels of ATR than market instruments with a higher price. For example, a market instrument with a price of \$ 10 would have a much lower Average True Range (ATR) value than a market instrument with a price of \$ 200. Because of this, ATR values can be difficult to apply for comparison among different market instruments. Even for a separate market instrument, large price movements, such as a decrease from 70 to 20, can make long-term ATR comparisons very problematic.

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