Average True Range
Definition:
Average True Range is a measure of volatility, and is measured by taking a moving average of the greatest value of the following: - The distance between this period's high & low,
- The distance from last period's close to this period's high or
- The distance from last period's close to this period's low
Interpretation:
Like other indicators that measure volatility, the conventional interpretation is for high periods or peaks in ATR to sometimes be considered clues that investors are having a bull vs. bear struggle, perhaps signalling that a top or bottom is approaching.During low periods or valleys in ATR, some investors consider this a sign of consolidation or sideways periods.
For certain volatility studies (because the value of Average True Range is expressed as an average of the distance between two prices rather than a percentage), the value of the ATR should not only be considered relative to itself, but also relative to the price of the stock.
In other words, a change in ATR value from 2 to 3 for a $15 stock represents a move of Price/ATR from 13% to 20%. A change in ATR value from 2 to 3 on a $50 stock represents a move of Price/ATR from 4% to 6%.
The typical moving average used for Average True Range is 14, which matches the default value in your charting program. A higher moving average might be used for long-term study while a shorter moving average can be used for very short-term study.
