Average True Range

Average True Range

Average True Range (ATR) is a technical analysis indicator developed by J. Welles Wilder, based on trading ranges smoothed by an N-day exponential moving average.

The range of a day's trading is simply mbox{high} - mbox{low}. The true range extends it to yesterday's closing price if it was outside of today's range:

: mbox{true range} = {max(mbox{high}, mbox{close}_mbox{prev}) - min(mbox{low}, mbox{close}_mbox{prev})}

The average true range is then an N-day exponential moving average of the "true range" values. Wilder recommended a 14-period smoothing. Note this is by his reckoning of EMA periods (see the EMA article on that), meaning an α=1/14.

The idea of ranges is that they show the commitment or enthusiasm of traders. Large or increasing ranges suggest traders prepared to continue to bid up or sell down a stock through the course of the day. Decreasing range suggests waning interest.

Further reading

* J. Welles Wilder, "New Concepts in Technical Trading Systems", Trend Research, 1978, ISBN 0-89459-027-8

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