The Average True Range (ATR) indicator is one which falls in the general category of volatility-based technical analysis tools. It is so because like Bollinger Bands, another volatility-based study, it does not focus on direction in any way, but rather how much raw movement there is in price. To understand this a little better, it is worth taking a look at how the indicator is calculated.
The ATR calculation starts with determining the True Range (TR). The TR for a given period is defined as being the largest of:
Current Period High minus Current Period Low
Current Period High minus Previous Period Close
Previous Period Close minus Current Period Low
ATR is the average of the True Range (TR) over the past n periods. This is calculated the same as any standard simple moving average. The default setting is generally 14 periods.
As can be seen by examining the determination of TR, the study is attempting to capture the amount of actual price moment which...
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