The average true range (ATR) is an indicator designed to measure the volatility of an asset. It is calculated by taking the moving average, usually 14 days, of the true range. The true range is the largest of the following three:
- the current high minus the current low
- the value of the current high minus the previous close
- the value of the current low minus the previous close
It was originally developed to measure volatility in commodities, but like many indicators it has found use for all markets. It allows traders to measure the daily volatility of an asset, and whether this is increasing or decreasing, and thus used as an aid to position sizing and stop placing. It does not indicate price direction, but instead tracks how much an asset moves in a given time period.
The chart below shows the FTSE 100, with a 14-day ATR. From the middle of the month ATR begins to rise, as the index experiences heightened volatility: