How Average True Range Differs from Standard Deviation
Summary
The document compares Average True Range (ATR) with standard deviation as measures related to market movement. Standard deviation is based on close-to-close returns and centers observations around their average, then squares deviations before averaging and taking a square root. This makes larger moves count disproportionately more than smaller ones.
ATR instead averages true ranges, which incorporate intraday highs and lows as well as gaps between sessions. It is not normalized around the average return, and true range is at least as large as the absolute close-to-close change. These differences mean the measures capture distinct aspects of price movement, so a direct conversion between them is not straightforward. The document’s headings indicate an intended empirical mapping, but the supplied text contains no method, data, or results for that analysis; it therefore offers only a brief conceptual comparison.
Key ideas
- Standard deviation measures dispersion of close-to-close returns around their average.
- Squaring deviations gives larger returns greater influence on standard deviation.
- ATR averages true ranges, which include intraday movement and can capture gaps.
- ATR and standard deviation differ in construction, so mapping one to the other requires care.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.