# Average True Range (ATR) in Trading - Indicator & Strategy

## ATR – Measuring Volatility

Simply put, this indicator measures volatility. Created by a man named Wilder, it was designed with daily prices and commodities as reference points. Commodities differ from stock mainly in that commodities are with more gaps, longer trading hours and more often circuit filter hits than large-cap stocks.

Many traders use this indicator to gauge stock volatility as well. Wilder also developed the Directional movement concept, Parabolic SAR and the RSI which are some of the most used indicators today.

It measures degree of price volatility only, so you cannot use this to gauge market direction.

## True Range

The range of a day (or any candle) is simply the high minus the low, this was the extent to which price was able to traverse during the day.

The indicator makes an exception to this calculation on gap days or inside days, so in summary:
The true range is the largest of the:
• High minus the low (most recent)
• Recent high minus the previous close
• Recent low minus the previous close

The average true range is a moving average (generally 14-days) of the true ranges.

## ATR During Volatile Times

If you remember the election results period in May 2014, the stock market exhibited a great amount of movement than it was previously bouncing in the range of. A single-day fluctuation of 2,000 points on the Sensex(1,000 points up then down) was seen on the election declaration day of 16th May 2014.
This is a chart of Nifty of the same time, as you can see the ATR has shot up in showcase of the market volatility.

## ATR Calculation

Current ATR = [(Prior ATR x 13) + Current TR] / 14

– Multiply the previous 14-day ATR by 13.
– Add the most recent day’s TR value.
– Divide the total by 14

## Summary

The ATR is not a directional indicator like the RSI, ADX, Stochastic or MACD, it is a unique indicator that measures volatility, or the interest or disinterest in a particular move. It can be used to reinforce the belief in a move, if there a surge in the ATR after a bullish reversal then you might conclude there is power in this move-up. The same applies for bearish reversals where it comes forward as a reinforcer not as a leading indicator.