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.
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.
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.