What ATR
Measures?
Learn the True Range and ATR formulas, verified against standard technical analysis sources including Wilder's original methodology.
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This lesson explains exactly what ATR measures, starting with the True Range calculation that forms its foundation.
These formulas have been verified against multiple technical analysis education sources, including Wilder's original methodology.
The True Range (TR) Formula
True Range for a given period is calculated as the greatest of three values: (1) the current high minus the current low, (2) the absolute value of the current high minus the previous close, and (3) the absolute value of the current low minus the previous close. This is expressed as: TR = max[(High β Low), |High β Previous Close|, |Low β Previous Close|].
Why True Range Accounts for Gaps
Wilder specifically designed True Range to capture volatility from price gaps (covered in the Understanding Volatility unit), not just the current period's high-low range. If a gap occurs β where the previous close is outside the current period's high-low range β the True Range calculation extends to include that gap, ensuring the full extent of the price movement is captured, rather than understating volatility during gapping conditions.
Calculating ATR from True Range
The first ATR value is generally calculated as a simple average of the first 14 True Range values (14 being the standard period). Subsequent ATR values use Wilder's smoothing method: Current ATR = [(Prior ATR Γ 13) + Current TR] Γ· 14. This smoothing approach is similar in spirit to an exponential moving average (covered in the earlier Moving Averages unit), weighting recent data while still incorporating the full prior history.
What a Higher or Lower ATR Value Represents
A higher ATR value reflects greater recent price volatility (larger true ranges), while a lower ATR value reflects lower recent volatility (smaller true ranges), directly quantifying the general volatility condition concept covered in the Market Guides module.
π Summary
ATR is built from True Range β the greatest of the current high-low range, or the gap between the current high/low and the previous close β specifically designed to capture volatility from price gaps, not just the current period's range. ATR itself applies Wilder's smoothing method to True Range values over a standard 14-period, directly quantifying the general volatility condition concept covered in the Market Guides module.
Frequently Asked Questions
What is the True Range formula?
TR = max[(High β Low), |High β Previous Close|, |Low β Previous Close|] β the greatest of these three values.
Why does True Range account for gaps?
Wilder designed it to capture volatility from price gaps, extending the calculation when the previous close falls outside the current period's high-low range.
How is ATR calculated from True Range?
The first ATR is a simple average of the first 14 True Range values; subsequent values use Wilder's smoothing: [(Prior ATR Γ 13) + Current TR] Γ· 14.
What does a higher ATR value represent?
Greater recent price volatility, directly quantifying the general volatility condition concept covered in the Market Guides module.
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