The Average True Range indicator is the average of all the true ranges considered over the specified period. It’s usually calculated based on 14 periods, which can be anything from intraday to weekly or monthly periods.
If the Average True Range (ATR) is expanding, it indicates that the market is volatile. ATR is not directional, so it can support either a decline or advance in the market when it is expanding. Expanding ATRs indicates strong market pressure to buy or to sell.
When the Average True Range is expanding, you’ll observe that each bar is getting larger. If the price reverses and the ATR increases, it indicates that there is the strength behind the move. If the ATR is very high, that’s usually the result of a sharp decline or advance and that’s unlikely to be sustained for a long time.
When the ATR is low, it indicates that the market volatility is low. That is, trading has occurred in very small ranges and there have been several quiet days. A prolonged low Average True Range may indicate a consolidation move and it’s possible that a reversal or a continuation move could occur.
Calculation
The Average True Range is an indicator of market volatility. While most calculations use a period of 14, if you would like to measure recent volatility, you’ll need to use a short average, such as two or ten periods. For longer volatility, traders may use up to 50 periods.
True Range is the greatest of the following three values:
- difference between the current maximum and minimum (high and low); ·
- difference between the previous closing price and the current maximum; ·
- difference between the previous closing price and the current minimum.