Average true range (ATR) by J. Welles Wilder is the daily “true range” values (see True Range) smoothed by an N-period exponential moving average (see Exponential Moving Average).
ATR = EMA[N] of True Range
The default smoothing period is 14 days, as recommended by Wilder. The period is always by Wilder’s reckoning of EMA smoothing period (see Wilder EMA period).
The idea behind ATR is that when traders are enthusiastic, either in an uptrend or downtrend, the range will be higher as the stock or commodity is bid up or sold down through the day. A lesser range suggests waning interest.
When a data source doesn’t provide high/low values (some indexes for instance), then just close-to-close changes are used. This may be of limited use.
The normalized ATR by John Forman (http://www.theessentialsoftrading.com) expresses the ATR as a percentage of the current closing price. This makes it possible to compare ATR values over long periods where a share price level (and hence the typical daily ranges) have changed greatly.
ATR NATR = 100 * ----- close
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