ATR

Definition:

The "Average True Range" (ATR) measures the conventional range of a bar but also includes in its calculation the previous bar's closing price to see if it is outside the current bar's range. This indicator may be considered a tool for measuring volatility of a security. Often, extremes in ATR are associated with a change in character of a market, from trending to trading range and vice versa.

Background:

If it is outside the current bar's range, then that closing price is used instead of the high or low. The previous bar's close would thus be considered to be a part of the current bar's range. This helps to account for gaps between bars. The ATR indicator calculates and plots the average of these values over a certain number of bars.

The ATR was introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems.

Practical Use:

The ATR readings are typically the most meaningful when the price and volume of the chart being analyzed have also set up a bullish or bearish pattern. Using the ATR for additional confirmation of what has already been "read" in the chart can be a powerful addition to the assessment tools used by a technical analyst.