Average True Range for Volatility, Compression, and Trade Levels
Summary
Average True Range (ATR), developed by J. Welles Wilder, measures price volatility rather than direction. The document defines true range as the greatest of the current high–low range and the distances from the previous close to the current high or low. ATR is a moving average of true range; the lookback can vary, with 14 periods described as a common choice and other windows also mentioned.
The notes suggest comparing short- and long-window ATR to identify unusually quiet conditions that may precede a large move, and using extreme ATR readings as possible context for a trend change or new trend. They also describe using ATR to help set stop-loss and take-profit distances. These are interpretive uses, not demonstrated trading results: no performance evidence or validation is provided, and low or high volatility does not reveal whether price will rise or fall. The compression example is presented as a possible setup condition, not a standalone entry signal.
Key ideas
- ATR measures the magnitude of price movement, not its direction.
- True range accounts for both the intraday range and gaps from the previous close.
- ATR is calculated as an average of true range over a selected lookback period.
- A short ATR that is small relative to a longer ATR can flag a period of volatility compression.
- ATR can inform stop and target distances, but the document provides no tested performance evidence.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.