Average True Range (ATR) is a volatility indicator. It is also used as part of other trading systems such as...

Overview

  • ATR provides a measure of volatility.
  • ATR is calculated as the moving average of true price ranges over a given period.
  • Developed by Welles Wilder and first described in his 1978 book New Concepts in Technical Trading Systems

Interpretation

Average True Range is a moving average of the True Range over "X" periods, usually 14-days. True Range is the greatest difference from the following choices:   • Today's high and today's low.
  • Today's high and yesterday's close, or
  • Today's low and yesterday's close.


True range is always a positive number (negative numbers from the calculation above are to be ignored).

Major tops are typically accompanied by high volatility during the blow-off phase of a market, as investors become more and more nervous and ready to take profits. Major bottoms are usually calmer, with low volatility, as the hopes for quick profits have faded.

Signals

High ATR values are often correlated with high volatility as prices bottom and there is a sell off.

Low ATR values are often correlated with low volatility as prices stabilize or move into a sideways channel prior to a possible breakout.

Interpretation

The Swing Index alone doesn't provide much in the way of signals. It should be used in conjunction with the Accumulative Swing Index.

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