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Type of Indicators in Technical Analysis – The Average True Range (ATR)

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The Average True Range (ATR) is an indicator used to measure price volatility. The creator J. Welles Wilder created this indicator specifically for commodities in mind due to commodity prices are more volatile than stocks, and that they are subject to price gap moves – a significant price movement between two trading sessions.

Although this is one of the indicators in Technical Analysis, it is not a leading indicator to forecast trend direction but rather the ATR is used to see how much raw movement there is in prices. In this manner, it reflects the interest or the disinterest in price movements or price volatility. The frequently used ATR setting is 14 days.

The two rules you need to remember with ATR are as follows:

(a) When the prices are more volatile, the ATR moves up.
(b) When the prices are less volatile, the ATR moves down.

In the illustration below, notice that when the ATR falls, there are only small price movements in the candlesticks within the green Support and Resistance. When the ATR line moves up, there are huge price movements hence, the candle sticks are longer in the purple circled area.

There are a number of traders who use the ATR to determine a stop loss position as well. When the market is more volatile, it is an indicator for a reverse position.

Other Indicators in Technical Analysis:

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