## What is the 'Average True Range - ATR'

The average true range (ATR) is a measure of volatility introduced by Welles Wilder in his book, "New Concepts in Technical Trading Systems." The true range indicator is the greatest of the following: current high less the current low, the absolute value of the current high less the previous close and the absolute value of the current low less the previous close. The average true range is a moving average, generally 14 days, of the true ranges.

Next Up

## BREAKING DOWN 'Average True Range - ATR'

Wilder originally developed the ATR for commodities, but the indicator can also be used for stocks and indices. Simply put, a stock experiencing a high level of volatility has a higher ATR, and a low volatility stock has a lower ATR. The ATR may be used by market technicians to enter and exit trades, and it is a useful tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction, rather it is used primarily to measure volatility caused by gaps and limit up or down moves. The ATR is fairly simple to calculate and only needs historical price data.

## ATR Calculation Example

Traders can use shorter periods to generate more trading signals, while longer periods have a higher probability to generate less trading signals. For example, assume a short-term trader only wishes to analyze the volatility of a stock over a period of five trading days. Therefore, the trader could calculate the five-day ATR. Assuming the historical price data is arranged in reverse chronological order, the trader finds the maximum of the absolute value of the current high minus the current low, absolute value of the current high minus the previous close and the absolute value of the current low minus the previous close. These calculations of the true range are done for the five most recent trading days and are then averaged to calculate the first value of the five-day ATR.

## Estimated ATR Calculation

Assume the first value of the five-day ATR is calculated at 1.41 and the sixth day has a true range of 1.09. The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one, and then adding the true range for the current period to the product. Next, divide the sum by the selected timeframe. For example, the second value of the ATR is estimated to be 1.35, or (1.41 * (5 - 1) + (1.09)) / 5. The formula could be repeated over the entire time period.

RELATED TERMS
1. ### Wide-Ranging Days

Wide-ranging days describe the price range of a stock on a particularly ...
2. ### Directional Movement Index - DMI

The Directional Movement Index, or DMI, is an indicator that ...
3. ### True Interest Cost - TIC

True interest cost is the real cost of taking out a loan including ...

A buy minus order is a type of order where a client instructs ...
5. ### Commodity Selection Index or CSI

Commodity Selection Index acts as a technical indicator and is ...
6. ### Book Value

1. The value at which an asset is carried on a balance sheet. ...
Related Articles

### Measure Volatility With Average True Range

Find more profitable entry and exit locations with this standard indicator.

### Sizing A Futures Trade Using Average True Range

Futures trading is risky business, so it's crucial that traders' positions match the level of risk they are willing to bear.
3. Investing

### A Guide to Understanding Market Volatility

Market volatility is inevitable. Understanding how it works can help investors keep calm during periods of short-term declines.

### Using Technical Indicators To Develop Trading Strategies

Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.

These complex indicators can help traders interpret trend changes, but are they too good to be true?

### The Most Volatile Stocks With Volume For Short-Term Traders

Looking for big daily moves with volume that makes it easy to get in and out. Here are four of the most consistently volatile stocks, with significant volume.

### The Anatomy of Options

Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
8. Investing

### How To Research Volatile Stocks

Volatile stocks scare some investors--they're worried about something they need to keep an eye on. Fortunately, great software is available to do that for you.
9. Investing

### Price Volatility Vs. Leverage

Learn how to effectively gauge the risk of the markets you trade.
RELATED FAQS
1. ### Which market indicators reflect volatility in the stock market?

Learn the most commonly used technical indicators of stock market volatility that are watched by stock market traders and ... Read Answer >>
2. ### What is the Volatility Ratio formula and how is it calculated?

Understand what the volatility ratio indicator is, how it is calculated and the way this technical indicator is used by traders ... Read Answer >>
3. ### How Are Book Value and Intrinsic Value Different?

Book value and intrinsic value are two ways to measure the value of a company. Find out which is known as the true value ... Read Answer >>
4. ### What can cause an asset to trade above its market value?

Learn some of the factors that can affect the price of an investment asset and the major reasons why an asset might trade ... Read Answer >>
5. ### What is the best measure of a stock's volatility?

Understand what metrics are most commonly used to assess a security's volatility compared to its own price history and that ... Read Answer >>
6. ### How do I start using technical analysis?

Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
Hot Definitions
1. ### Working Capital

Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
2. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
3. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
4. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
5. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
6. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.