Average True Range (ATR) - What is it?

The Average True Range (ATR) is a volatility indicator that is simply an average of the ‘True Range’ over a number of periods, usually 14 days. For example, if the True Range over 14 consecutive days is as follows: 5 8 3 5 8 8 9 7 4 7 6 3 6 5. The Average True Range for that 14 day period is 6.

5 + 8 + 3 + 5 + 8 + 8 + 9 + 7 + 4 + 7 + 6 + 3 + 6 + 5 = 84 ( / 14) = 6

The True Range of a particular day is calculated as being the greater of the following:
- the distance from today's high to today's low.
- the distance from yesterday's close to today's high.
- the distance from yesterday's close to today's low.

True Range differs from a daily range as True Range includes any overnight gaps in price.

Chart supplied by www.incrediblecharts.com

You can see in the above figure at point (1) that the underlying price for David Jones Limited (DJS) becomes more volatile. At the same, the Average True Range indicator increases (2). Therefore, the higher the value of the ATR indicator, the more volatile the stock is. (As I reside in Australia, all the data I refer to will be ASX Data).

This discussion on ATR will lead into my next article on position sizing and stop loss.

I would like to thank the staff at incredible charts for allowing me to use their charts as visual aids.