What is Average True Range (ATR)?
Average true range (ATR) is a technical indicator that measures the volatility of an asset's average daily price movements.
How Does Average True Range (ATR) Work?
Average true range starts with the concept of 'true range.' True range (TR) is calculated by choosing the largest number from the following:
- Current high less current low
- Current high less previous close
- Current low less previous close
Use the absolute value of each metric to ensure positive numbers and pick the largest. Then, average the TR from each of the most recent 14 days to calculate average true range (ATR).
Why Does Average True Range (ATR) Matter?
ATR is used to calculate the volatility of a stock, ETF, bond, commodity, etc. However, it's important to note that ATR does not indicate price direction.
As the underlying volatility of an asset increases, so does ATR. For example, during October 2008, the volatility of the S&P 500 index peaked with a daily ATR of 78.
