The Average True Range is an indicator developed by Welles Wilder to measure volatility.
Wilder believed that high ATR readings occur at bottoms after a strong downtrend characterized by “panic” sell-off. Low ATR readings are usually found at tops and during periods of consolidation.
Trend reversals are usually accompanied by high ATR values, whereas sideways movements or weak trends are accompanied by low values.
The True Range is the greatest of the following:
- The difference between the current period’s high and low
- The absolute value of the difference between the previous period’s close and current period’s high
- The absolute value of the difference between the previous period’s close and current period’s low
The Average True Range is the moving average of the true range values.