Education | Technical Indicators | Candlesticks | Chart Patterns
Average True Range
Definition:
Average True Range is a measure of volatility, and is measured by taking a moving average of the greatest value of the following:
- The distance between this period's high & low,
- The distance from last period's close to this period's high or
- The distance from last period's close to this period's low
Like other indicators that measure volatility, the conventional interpretation is for high periods or peaks in ATR to sometimes be considered clues that investors are having a bull vs. bear struggle, perhaps signalling that a top or bottom is approaching.
During low periods or valleys in ATR, some investors consider this a sign of consolidation or sideways periods.
For certain volatility studies (because the value of Average True Range is expressed as an average of the distance between two prices rather than a percentage), the value of the ATR should not only be considered relative to itself, but also relative to the price of the stock.
In other words, a change in ATR value from 2 to 3 for a $15 stock represents a move of Price/ATR from 13% to 20%. A change in ATR value from 2 to 3 on a $50 stock represents a move of Price/ATR from 4% to 6%.
The typical moving average used for Average True Range is 14, which matches the default value in IQ Chart. A higher moving average might be used for long-term study while a shorter moving average can be used for very short-term study.
