7/23/2019 Average True Range (ATR) - ChartSchool - StockCharts http://slidepdf.com/reader/full/average-true-range-atr-chartschool-stockcharts 1/5 rage True Range (ATR) - ChartSchool - StockCharts.com 5/24/2013 1:56 ://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_atr StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Aver age True Range (ATR) Advertisement Average True Range (ATR) Introduction Developed by J . Welles Wilder , the Average True Range (ATR) is an indicator that measures volatility . As with mostof his indicators, Wilder designedATR withcommodities anddailyprices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indicationof price direction, justvolatility. Wilder features AT R in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR , R SI and the Directional Movement Concept (ADX). Despite being developed beforethe computer age, Wilder 's indicators havestoodthe test of timeandremain extremelypopular . True Range Wilder started with a concept called True Range (TR), which is definedas the greatest of thefollowing: Method 1: Current High less the current Low Method 2: C urrent High less the previous Close (absolute value) Method 3: Current Low less the previous C lose (absolute value) Absolute values are used to ensure positive numbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current period's high is above the prior period's high and the low is below the prior period's low, then the current period's high-low range will be used as the Tru Range. This is an outside day that would use Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when there is a gap or an inside day. A gap occurs when the previous close is greater than the current high (signaling a potential gap down or limit move) or the previous close is lower t the current low (signaling a potential gap up or limit move). T he image below shows examples of when methods 2 and 3 are appropriate. Example A: A small high/low range formed after a gap up. The TR equals the absolute value of the difference between the current high and the previous close Example B: A small high/low range formed after a gap down. The TR equals the absolute value of the difference between the current low and the previous clos Example C: Even though the current close is within the previous high/low range, the current high/low range is quite small. In fact, it is smaller than the absolute value of the difference between the current high and the previous close, which is used to value the TR . Calculation Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the AT will be based on daily data. Because there must be a beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the average o the daily TR values for the last 14 days. After that, W ilder sought to smooth the data by incorporating the previous period's ATR value. Create PDF files without this message by purchasing novaPDF printer ( http://www.novapdf.com )
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7/23/2019 Average True Range (ATR) - ChartSchool - StockCharts
StockCharts.com- ChartSchoolLearn more about Technical Analysis and Charting Terminology
Youare here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Aver age True Range (ATR)
Advertisement Average True Range (ATR)
Introduction
DevelopedbyJ . Welles Wilder, the Average TrueRange (ATR) is an indicator thatmeasuresvolatility. As
with most of his indicators, Wilder designed ATR with commodities anddailyprices in mind. Commodities
arefrequentlymore volatile than stocks. Theywereareoftensubject togaps and limit moves, whichoccur
whena commodity opens up or downits maximumallowedmove for the session. A volatility formulabased
only on the high-lowrange wouldfail tocapture volatility from gap or limit moves. Wilder createdAverage
True Range to capture this "missing" volatility. It is important to remember thatATR does notprovide an
indication of price direction, just volatility.
Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This bookalso
includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite beingdeveloped
before the computer age, Wilder's indicators havestoodthe test of time andremain extremelypopular.
True Range
Wilder started witha concept calledTrue Range (TR), which is defined as the greatest of the following:
Method 1: CurrentHigh less the current Low
Method 2: Current High less the previous Close (absolutevalue)
Method 3: CurrentLow less the previous Close (absolute value)
Absolutevalues are usedtoensure positivenumbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the
current period's high is above the prior period's high and the lowis belowthe prior period's low, then the current period's high-lowrange will be usedas the Tru
Range. This is anoutside day that woulduse Method 1 to calculate the TR. This is pretty straight forward. Methods 2and 3 are used whenthere is a gap oran
inside day. A gapoccurs whenthe previous close is greater than the currenthigh (signaling a potential gap downor limit move)or the previous close is lower t
the current low(signaling a potential gap upor limit move). The image belowshows examples of whenmethods 2 and 3 are appropriate.
ExampleA: A small high/lowrange formed after a gap up. The TR equals the absolutevalue of the difference between the current high and the previous close
ExampleB: A small high/lowrange formed after a gap down. The TR equals the absolutevalue of the difference between the current lowand the previous clos
ExampleC: Even though the current close is within the previous high/low range, the current high/lowrange is quite small. In fact, it is smaller than the absolute
value of the difference between the currenthigh and the previous close, which is used tovalue the TR.
Calculation
Typically, the Average True Range (ATR) is based on14periods and can becalculated onanintraday, daily, weekly ormonthlybasis. For this example, the AT
will bebased on dailydata. Because there mustbe a beginning, the first TR value is simplythe High minus the Low, andthe first 14-dayATR is the average o
the dailyTR values for the last14days. After that, Wilder sought tosmooth the databyincorporating the previous period's ATR value.
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Curr ent ATR = [ ( Pri or ATR x 13) + Curr ent TR] / 14
- Mul t i pl y t he previ ous 14- day ATR by 13.
- Add t he most r ecent day' s TR val ue.
- Di vi de t he t otal by 14
Clickhere for anExcel Spreadsheetshowingthe startof an ATR calculation forQQQ.
In the spreadsheet example, the first True Range value (.91) equals the High minus the Low(yellowcells). Thefirst 14-day ATR value (.56)) was calculated by
findingthe average of the first 14True Range values (blue cell). Subsequent ATR values weresmoothed using the formula above. The spreadsheet values
correspondwith the yellowarea on the chart below. Notice how ATR surged as QQQQ plunged in Maywith many long candlesticks.
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For those tryingthis athome, a fewcaveats apply. First, ATR values depend on where you begin. The first True Range value is simplythe currentHigh minus currentLowand the first ATR is an average of the first 14TrueRange values. The real ATR formula does not kick in until day15. Even so, the remnants of th
first two calculations linger toslightly affect ATR values. Spreadsheetvalues for a small subset of datamaynot match exactly withwhat is seen on the price ch
Decimal roundingcan also slightly affect ATR values.
Abso lut e ATR
ATR is based on the True Range, which uses absoluteprice changes. As such, ATR reflects volatility as absolute level. Inother words, ATR is not shown as
percentage of the current close. This means lowpricedstocks will have lower ATR values than high price stocks. Forexample, a $20-30securitywill have muc
lower ATR values than a $200-300 security. Because of this, ATR values are not comparable. Even large price movements for a single security, such as adec
from 70to20, can make long-term ATR comparisons impractical. Chart 4 shows Google withdouble digit ATR values andchart 5 shows Microsoft with ATR
values below 1. Despite different values, theirATR lines have similar shapes.
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ATR is nota directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator that reflects the degree of interest or disinterest in a move
Strong moves, in either direction, are oftenaccompanied bylarge ranges, or large True Ranges. This is especially true atthe beginning of a move. Uninspiring
moves can be accompanied byrelativelynarrow ranges. As such, ATR can be used tovalidate the enthusiasm behind a move or breakout. A bullish reversal w
an increase in ATR would show strong buying pressureand reinforce the reversal. A bearish supportbreak with an increase in ATR would show strong selling
pressureand reinforce the support break.
SharpCharts
Listed as "Average True Range", ATR is on the Indicators drop-downmenu. The "parameters" box tothe rightof the indicator contains the defaultvalue, 14, fo
the number of periods used tosmooth the data. To adjustthe period setting, highlight the defaultvalue and enter anew setting. Wilder oftenused 8 period AT
SharpCharts alsoallows users to position the indicator above, below, or behind the price plot. A moving average can beadded toidentifyupturns or downturns
ATR. Click "advanced options" toadd a movingaverage as an indicatoroverlay. Clickherefor a live example of ATR.
Further Study
New Concepts in Technical Trading Systems
Welles Wilder
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