The Average True Range (ATR)

Developed by J. Welles Wilder, the Average TrueRange (ATR) is an indicator that measures volatility. As with most of hisindicators, Wilder designed ATR with commodities and daily prices in mind.Commodities are frequently more volatile than stocks. They were are oftensubject to gaps and limit moves, which occur when a commodity opens up or downits maximum allowed move for the session. A volatility formula based only onthe high-low range would fail to capture volatility from gap or limit moves.Wilder created Average True Range to capture this “missing” volatility. It isimportant to remember that ATR does not provide an indication of pricedirection, just volatility.

Wilder features ATR in his 1978 book, NewConcepts in Technical Trading Systems. This book also includes the ParabolicSAR, RSI and the Directional Movement Concept (ADX). Despite being developedbefore the computer age, Wilder's indicators have stood the test of time andremain extremely popular.

True Range and forex signals

Wilder started with a concept called True Range(TR), which is defined as the greatest of the following:

Method 1: Current High less the current Low

Method 2: Current High less the previous Close(absolute value)

Method 3: Current Low less the previous Close(absolute value)

Absolute values areused to ensure positive numbers. After all, Wilder was interested in measuringthe distance between two points, not the direction. If the current period'shigh is above the prior period's high and the low is below the prior period'slow, then the current period's high-low range will be used as the True Range.This is an outside day that would use Method 1 to calculate the TR. This is prettystraightforward. 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 lowerthan the current low (forexsignals a potential gap up or limit move).

Average True Range(ATR) Conclusions and freeforex signals

ATR is not a directionalindicator, such as MACD or RSI. Instead, ATR is a unique volatility indicatorthat reflects the degree of interest or disinterest in a move. Strong moves, ineither direction, are often accompanied by large ranges, or large True Ranges.This is especially true at the beginning of a move. Uninspiring moves can beaccompanied by relatively narrow ranges. As such, ATR can be used to validatethe enthusiasm behind a move or breakout. A bullish free forex signals reversal with an increase in ATR would showstrong buying pressure and reinforce the forex signals reversal. A bearish support break with anincrease in ATR would show strong selling pressure and reinforce the supportbreak.

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