The Average True Range (ATR) is a technical indicator that measures the volatility of a financial instrument. It was developed by J. Welles Wilder Jr. and is commonly used by traders to identify potential trading opportunities and to assess the risk associated with a trade.
The ATR is calculated by taking the average of the true range over a specified period of time. The true range is the greatest of the following:
The ATR is typically calculated using a 14-day period, but other periods can be used depending on the trader’s preference and the time frame of the chart. The ATR is typically shown on a chart as a single line, with higher values indicating higher volatility and lower values indicating lower volatility.
Traders can use the ATR to identify potential trading opportunities and to assess the risk associated with a trade. For example, a trader may buy a stock when the ATR is low and sell it when the ATR is high, or use the ATR to set a stop-loss level for a trade. The ATR can also be used in conjunction with other technical indicators to form a complete trading strategy.