Average True Range (ATR) is a volatility indicator. A high (or low) ATR indicates that a stock is more (or less) volatile.
The calculation behind the ATR begins by finding the True Range, which is the greatest of the following:
- Today's high - Today's low
- Today's high - Yesterday's close
- Yesterday's close - Today's low
The Average True Range is simply a moving average of the True Range, and it’s typically worked out using a 14 day moving average.
ATR can be used to generate buy or sell signals. Some traders buy a stock when the price reaches the level equivalent to the open price, plus the ATR (or a multiple of the ATR). Alternatively, some traders sell a stock when the price reaches the level equivalent to the open price, minus the ATR (or a multiple of the ATR).