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Average True Range - ATR

The Average True Range (ATR) is a technical indicator that measures market volatility. It was developed by Welles Wilder and described in his book New Concepts in Technical Trading Systems. Since then it is used in conjunction with other indicators and trading systems.

Often ATR approaches extreme marks at the market bottom after prices’ slump that is usually caused by panic. Relatively low indicator’s values mostly correspond to prolonged periods of horizontal movement seen at the market’s tops and during consolidation. The Average True Range is interpreted just like any other indicator that reflects volatility. ATR forecast principle may be expressed as follows: high reading enhances the possibility of a trend change; low reading means a trend direction weakens.

Calculation

True Range is the greatest of the following three values:

- difference between the current high and low;

- difference between the previous closing price and the current high;

- difference between the previous closing price and the current low.

The indicator of Average True Range is a moving average of values of the true range.

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