Average True Range

 

 

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Average True Range

Average True Range (ATR) is a form of volatility indicator. Initially applied to the commodities market and daily prices, it measures the degree of price movement as an absolute level and attempts to draw conclusion on market behavior based on the level of activity. As the name implies, it is a moving average of the True Ranges.

The True Ranges are determined to be the largest of the following :

– distance between the period high and the period low
– distance between the previous close and the current period high
– distance between the previous close and the current period low

As with most volatility indicators, high ATR values are usually interpreted as a mark of possible turning points in price movement, with the higher ranges reflecting a period of extreme flux in the struggle between bulls and bears. Lower ATR for their part are said to be periods of consolidation often preceding the establishment of a trend.

Average True Range

In the preceding chart, the red ellipses represent a period of accumulation for the Ozzy dollar with congestive prices accompanied by prolonged sideways movement in the ATR. The succeeding blue horizontal lines for their part marks a relatively important top and possible reversal in price movement.

The ATR is another indicator developed by J. Welles Wilder, Jr. and introduced in his 1978 book New Concepts in Technical Analysis. It is a first among the volatility studies in its attempt to factor in the occurrence of gaps in prices.

Average Directional Index (Directional Movement System)

Bollinger Bands

Commodity Channel Index

Envelope

MACD (Moving Average Convergence Divergence)

Moving Average

Parabolic SAR

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