Average True Range

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Average True Range, or ATR attempts to quantify a given market's volatility.

True Range is the greater of:

Current Session (High-Low) or (High-Previous Close) or (Low-previous Close)

Average True Range is then calculated by averaging the True Range for a specific time period.[1] Frequently used for calculating stop-loss orders, effort should be made to generate a statistically significant ATR while avoiding excessive damping. For example, ATR for three trading sessions probably uses too few sessions to be statistically significant. A very large number would offer too much damping of volatility, so ATR for 100 sessions would almost certainly be too many. Credit for developing ATR as a trading tool is given to J. Welles Wilder. [2]

References

  1. Average True Range. Meta Stock.
  2. Average True Range. Answers.com.