ATR (Average True Range)
Also called: Average True Range, ATR, Avg True Range, Average True Range indicator, ATR indicator, true range average.
Formula
True Range (TR) = max[ (High - Low), |High - Previous Close|, |Low - Previous Close| ]. ATR is the moving average of TR over N periods (typically N = 14). The original Wilder version uses a smoothed average: ATR_today = ((ATR_prev x (N - 1)) + TR_today) / N, with the first ATR taken as the simple average of the first N true ranges.
How it is read
ATR is commonly read as a gauge of recent volatility. A rising ATR indicates that bar-to-bar ranges are widening. A falling ATR indicates ranges are contracting. It includes the gap from the previous close, so it is often used to compare how "active" different stocks or expiries are. It is also used to put distances on a chart in a common unit. One example is a band sized as a multiple of the ATR reading. It is typically treated as context about the current price environment, not as a direction or timing input on its own.
What it does not tell you
ATR is non-directional. It measures the size of moves, not whether price is going up or down. So a large ATR does not indicate which way price will go next. It lags, because it averages past bars, and it can change sharply around events, expiry or news. It does not predict future range. It is also in absolute price units. So ATR values from instruments at very different price levels are not directly comparable. They must first be normalised, for example as a percentage of price. By itself ATR says nothing about trend, liquidity or option premium, and it is not a buy or sell signal.
Related concepts
Range Compression and Expansion: The Squeeze Before a Move
Range compression is a stretch of narrow candles and falling volatility. Price coils in a tight box. It often ends with an expansion candle. That candle breaks out of the box. Compression describes energy building up. Which way the box breaks is not set in advance.
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