Average True Range
The Average True Range (ATR) technical indicator tracks market volatility.
ATR often displays a high value at the lower end of the market after a major decline in prices during phases such as panic selling. The indicator at lower levels tends to reflect periods of long-lasting sideways movement, which typically occur at market tops or during consolidations.
ATR can be interpreted in the same manner as other volatility indicators.
Day-to-day use of this indicator is based on the following principle:
The higher the value of the indicator, the higher the probability of a trend change; the lower the indicator's value, the weaker the trend's movement.
Calculating ATR first requires the True Range. True Range includes the current period high/low range and the previous period close.
There are three calculations to be completed, which are then compared to each other. The True Range is the largest value of the following three calculations:
1. current period high minus (-) current period
2. absolute value (abs) of the current period high minus (-) the previous period close
3. absolute value (abs) of the current period low minus (-) the previous period close
True Range = max[(high - low), abs(high - previous close), abs (low - previous close)]
ATR does not measure price direction, only volatility, and therefore it has no need for negative values.