What is the Average True Range (ATR)?
The Average True Range (ATR) is a technical analysis indicator that measures market volatility. Developed by J. Welles Wilder Jr., it doesn't show price direction but rather the degree of price movement. Higher ATR values indicate greater volatility, while lower values suggest calmer market conditions. It's a crucial tool for position sizing and stop-loss placement.
How it Works
ATR calculates the 'True Range' (TR) for each period, considering the high, low, and previous close. TR is the greatest of: current high minus current low, absolute value of current high minus previous close, or absolute value of current low minus previous close. ATR then averages these True Range values over a specified period.
Trading Signals
ATR itself doesn't generate buy or sell signals. Instead, it's used in conjunction with other indicators. Rising ATR can signal a potential breakout or increased risk. Traders often use ATR to set stop-loss levels, placing them a multiple of the ATR value away from the entry price to account for volatility. A spike in ATR can also indicate a potential trend reversal.
Basic Settings
The default ATR period is 14. Shorter periods (e.g., 7) are more sensitive to price changes, while longer periods (e.g., 21) provide a smoother reading. Experiment with different settings to find what works best for your trading style and the specific asset you're analyzing. This is for educational purposes only, not financial advice.