ATR

ATR is an indicator that measures how widely the price moves within a bar on average over a chosen stretch of history. It answers one question: what range should be considered normal for this security. ATR does not show the direction of the move at all — a rising indicator means only that the bars have become wider, and it falls in exactly the same way on a fading rally and on a fading decline. In essence it is a numerical expression of volatility, tied to a specific instrument and a specific timeframe.

How the true range is built

The ordinary range of a bar is the distance from its high to its low, but it takes no account of the gap between bars. That is why the true range is defined as the largest of the following values: the range of the bar itself, the distance from its high to the close of the previous bar, and the distance from its low to that same close. This way a gap at the open is captured in the calculation instead of being lost.

The resulting series of true ranges is then averaged — the classic version uses exponential smoothing, so older bars affect the result less and less, yet never drop out of it completely. Hence the main property: ATU responds to a surge in the range with a delay, and the longer the indicator period, the more sluggish the response. It is a lagging indicator: it describes what has already happened.

Example: one instrument, one scale

The range of a bar can be seen directly on the chart — from the length of the candle wicks and the distance between neighbouring bars:

Stretches where the candles lengthen and overlap one another with gaps produce a high ATR; stretches of a quiet sideways market with short bodies produce a low one.

Where ATR is misread

The main mistake is comparing the ATR of two different securities. The indicator is expressed in the same units as the price, so for an expensive stock it is almost always larger than for a cheap one, and that says nothing about how "nervous" the stock is. The figure becomes comparable only after it is divided by the price, that is, after it is converted into relative form.

The second is carrying a value over from one scale to another: ATU on an hourly chart and on a daily chart measure different things and cannot be converted into each other by simple multiplication. The third is days with a scheduled gap: an ex-dividend date, a split, the resumption of trading after a halt. The true range of such a bar includes the gap in full, and for a long time the indicator shows a range that is no longer there in trading. At such moments it is more useful to look not at ATR but at the market regime as a whole.