The average true range (ATR) is a powerful technical analysis indicator that measures market volatility by analyzing the price range of an asset over a defined period. Introduced by market technician J. Welles Wilder Jr., the ATR helps traders and investors assess an asset’s price movement, ultimately making more efficient trading decisions.
Key Takeaways
- The ATR is a primary tool for gauging market volatility in technical analysis.
- It’s typically derived using a 14-day simple moving average of the true range values.
- The ATR is applicable across various securities, not just commodities.
- It helps investors understand the average range of price movements over a specific period.
The Average True Range (ATR) Formula
The formula to calculate ATR for an investment is as follows:
If there’s a previous ATR calculation:
ARO = (Previous ATR * (n - 1) + TRn) / n
where:
ARO = Current Average Range
n = Number of periods
TRn = True Range of current day
If there isn’t a previous ATR calculation:
ARO = (1/n) * Σ TRi
where:
(APST1 = PARTICULAR TRUE RANGE first day , then second day, and so on )
i = starting period ( always determined)
To Calculate the True Range
TR = Max
definition_Max
TR_RANGE where:
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**Related Terms:** True Range, Market Volatility, Technical Indicators.
### References
1. TradingView. ["Average True Range (ATR)"](https://www.tradingview.com/support/solutions/43000501823-average-true-range-atr/).
2. Andreas Clenow. ["Following the Trend"](https://www.wiley.com/en-us/Following+the+Trend%3A+Diversified+Managed+Futures+Trading,+2nd+Edition-p-9781119908982), Pages 54--6, 76--9. John Wiley \& Sons, 2023.
3. StockCharts. ["Chandelier Exit"](https://school.stockcharts.com/doku.php?id=technical_indicators:chandelier_exit).
## Get ready to put your knowledge to the test with this intriguing quiz!
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## What does Average True Range (ATR) measure in a financial instrument?
- [x] Volatility
- [ ] Profit margins
- [ ] Trading volume
- [ ] Liquidity
## Who was the pioneer of the Average True Range (ATR) indicator?
- [ ] Warren Buffett
- [x] J. Welles Wilder Jr.
- [ ] George Soros
- [ ] Benjamin Graham
## In which book was the Average True Range (ATR) first introduced?
- [ ] The Intelligent Investor
- [ ] Common Stocks and Uncommon Profits
- [x] New Concepts in Technical Trading Systems
- [ ] Security Analysis
## How is the true range (TR) for a single time period calculated in ATR?
- [x] The greatest value between: current high minus current low, absolute value of current high minus previous close, absolute value of current low minus previous close
- [ ] Current high minus current low
- [ ] Previous close minus current open
- [ ] The smallest value of current high minus current low, and absolute value of current high minus previous close
## Which of the following is NOT a typical application of ATR?
- [ ] Identifying entry and exit points
- [ ] Identifying trailing stop levels
- [x] Determining market trend direction
- [ ] Measuring market volatility
## When using ATR, what does a high ATR value typically indicate?
- [ ] Low market volatility
- [x] High market volatility
- [ ] Stable price movement
- [ ] Negative sentiment in the market
## Over which period is ATR commonly calculated?
- [ ] 7 days
- [x] 14 days
- [ ] 21 days
- [ ] 30 days
## How does ATR adapt to market conditions?
- [ ] It remains constant over time
- [ ] It becomes less effective in volatile markets
- [ ] It fluctuates based on trading volume
- [x] It adjusts to changing volatility, increasing in volatile periods and decreasing in stable periods
## Why might a trader prefer using the ATR indicator?
- [ ] To anticipate future price levels
- [ ] To determine the intrinsic value of a stock
- [ ] To calculate dividend yields
- [x] To set better stop-loss levels based on volatility
## Which of the following technical indicators can be combined with ATR for better trading strategies?
- [x] Moving averages
- [ ] Dividend discount models
- [ ] Price-to-earnings ratio
- [ ] Debt-to-equity ratio
