Average True Range Calculation for Forex

Average True Range: A measure of Volatility!
Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility.
True Range
Wilder started with a concept called True Range (TR), which is defined as the greatest of the
following:
 Method 1: Current High less the current Low
 Method 2: Current High less the previous Close (absolute value)
 Method 3: Current Low less the previous Close (absolute value)

Calculation – Average True Range
Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an
intraday, daily, weekly or monthly basis. For this example, the ATR will be based on daily data.
Because there must be a beginning, the first TR value is simply the High minus the Low, and the first
14-day ATR is the average of the daily TR values for the last 14 days. After that, Wilder sought to
smooth the data by incorporating the previous period's ATR value.


Current ATR = [(Prior ATR x 13) + Current TR] / 14
- Multiply the previous 14-day ATR by 13.
- Add the most recent day's TR value.
- Divide the total by 14
Conclusion
ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator
that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are
often accompanied by large ranges, or large True Ranges. This is especially true at the beginning of a
move. Uninspiring moves can be accompanied by relatively narrow ranges. As such, ATR can be used
to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR
would show strong buying pressure and reinforce the reversal. A bearish support break with an
increase in ATR would show strong selling pressure and reinforce the support break.