ATR

[THEO-007]

Background: The index was developed by J. Welles Wilder Jr. and was introduced in 1978's book, New Ideas in Systems Negotiation Techniques . This is another measure of price-based variability over a specific time period, with a higher ATR showing a high level of volatility and low ATR showing a low level of volatility.

The ATR is based on its true moving average and ranges, usually for 14 periods. True area is the largest of:

• today's highs minus the current low.
  
• absolute value of the high current less the previous closure.
• absolute value of the current less than the previous closing.

Purpose: ATR was mainly developed for commodity markets to measure daily price volatility. These markets are more likely to have price gaps or limitations, which means that a type of volatility based only on the high-low range will not include the effects of these gaps but also the constraints on the movements. ATR includes what is lacking in volatility using absolute values, but it does not indicate the direction of the values, which reflects only the degree of interest or indifference in a move.

Key Messages: If the current high is above yesterday's high and the current low is below yesterday's low, then the high-low range is used as the true range (the first alternative above).

Strong trading movements, either upward or downward, often involve a large range or large real areas, especially at the beginning of a move. As a result, the ATR can be used to help you identify the excitement behind a move or the reinforcement after breakout.

Pro / con: ATR provides a better measurement of the recent range of a market and volatility over a given period of time. However, for markets that are constantly trading around the clock, a steady flow of prices may reduce the need for the ATR.

 

[THEO-007]

Answer: ATR

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