Average True Range (ATR) is a financial metric that measures market volatility. It was developed by J. Welles Wilder Jr. and is commonly used by traders to assess the degree of price fluctuation of an asset over a specific period.
ATR is calculated by taking the average of the True Range values over a designated timeframe, typically 14 days. The True Range is determined by considering the highest price and lowest price over the selected period, including the previous day’s closing price to account for gaps in trading. This calculation provides a clearer view of volatility than simple price changes, as it incorporates various price movements.
In finance, ATR is relevant for risk management and position sizing. Traders use ATR to set stop-loss orders and determine optimal entry and exit points. A higher ATR indicates increased volatility, suggesting a potentially higher risk, while a lower ATR signals more stable conditions. Therefore, understanding ATR helps investors make informed decisions, adapting their strategies based on the volatility of the market.
