Average True Range

Description

The True Range indicator is defined by Wilder to be the greatest of the following for each period:

• The distance from today's high to today's low.

• The distance from yesterday's close to today's high.

• The distance from yesterday's close to today's low.

The Average True Range is simply the average of the true ranges over the past x periods (where x is specified by the user).

Interpretation

In his book, New Concepts In Technical Trading Systems, Wilder defines a trading system that uses the Average True Range. He also provides details on calculating the Average True Range and the trading system.

The Average True Range also can be interpreted using the same techniques that are used with the other volatility indicators. Refer to the discussion on Standard Deviation for additional information on volatility interpretation.