The Average True Range

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The Average True Range (ATR) is a financial trading technical analysis indicator. ATR was introduced in 1978 by Welles Wilder in his book “New Concepts in Technical Trading Systems.” It assesses the market’s historical and current volatility. 

The ATR measures simply volatility and nothing else. It’s referred to be a directionally neutral indication. 

The indicator is simple to understand since it consists of a single line that oscillates up and down in response to market volatility. 

When volatility rises, the ATR value rises; when volatility falls, the ATR value falls. The smoothed moving average (SMMA) of the real range for a particular period is used in the formula.

The real range is the biggest of the three values: 1) the most recent period high minus the most recent period low, 2) the absolute value of the most recent period high minus the previous close, and 3) the absolute value of the most recent period low minus the previous close. 

While it is not necessary to understand the mathematics underlying the ATR, it is necessary to understand how to utilise and use it, as it may provide a significant advantage to one’s trading. 

Simply put, when a trader knows and employs the ATR indicator, he or she may more accurately identify exit points.

The ATR’s primary application is in determining where a trader’s profit objectives and stop losses should be placed. 

Consider the forex market, where there are numerous circumstances of marketable currency pairings available, each with a significantly different volatility. 

Pairs with minimal volatility include the EUR/CHF and the USD/JPY, whilst pairs with high volatility include the GBP/JPY and the EUR/CAD. 

Overall, the greater an asset’s ATR value, the broader the stop loss and profit goal. 

The smaller the ATR value, on the other hand, the narrower the stop loss and profit goal.

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