Average True Range

For a couple of weeks now, I have been promising to do an article about Average True Range (ATR). I have been planning to incorporate a few more technical indicators into my charts, but it's not practical if I don't know what they indicate or how they are constructed. Unfortuantely, after reading about ATR, I'm till a little foggy about what exactly I am looking at, although, at it's basic core, it is a measure of volatility.

Stockcharts.com has an excellent introduction to ATR, along with every other indicator they use, in their chart school, The calculation is a bit complicated, but detailed quite thoroughly on stockcharts. Suffice it to say that the lower the line, the smaller the stock's moves are, and the higher the line , the bigger. When the line trends down, generally that means price is moving less (often on lower volume, but not necessarily), and when trending up, price is moving more (often on higher volume, but again not necessarily).


Here is AMZN, a stock I picked at random. AMZN went through a trading range (or base) from June through September, and ATR went into an overall decline, indicating price movement was getting smaller. In September it went through it's first breakout attempt, and ATR began to trend up, until the second breakout, when ATR went straight up. It then went into a very brief decline as price consolidated before the lastest move up.

According to stockcharts, ATR can be very useful in identifying potential bottoms and tops in markets. A common way of interpreting the ATR is by looking for low readings. Periods where the ATR is at a low point may indicate that price has reached a top or a bottom, and is prone to reversal. It tells you nothing about the potential direction or distance.

I will try to incorporate more indicators, although frankly I fiund them of lmited usefulness. They can, however, help confirm changes in trend spotted in price and volume patterns.