Unlike many of today's popular indicators, the ATR is not used to indicate the direction of price. Rather, it is a metric used solely to measure volatility, especially volatility caused by price gaps or limit moves.
Much like the indicators mentioned, the ATR is still widely used and has great importance in the world of technical analysis. Average True Range is a continuously plotted line usually kept below the main price chart window. The way to interpret the Average True Range is that the higher the ATR value, then the higher the level of volatility.
As previously stated Average True Range does not take into account price direction , therefore it is not used as an active indicator to predict future moves. Instead, it is most useful in measuring the strength of a move. For example, if a security's price makes a move or reversal , either Bullish or Bearish , there will usually be an increase in volatility. In that case, the ATR will be on the rise. This can be used as a way to gauge the underlying strength of the move.
The more volatility in a large move, the more interest or pressure there is reinforcing that move. On the other hand, during periods of sustained sideways movement, volatility is frequently low. This could assist in the discovery of trading ranges. The fact that ATR is calculated using absolute values of differences in price is something that should not be ignored. This is relevant because it means that securities with higher price values will inherently have higher ATR values.
Likewise, securities with lower price values will have lower ATR values. The consequence is that a trader cannot compare the ATR Values of multiple securities. A trader should study and research the relevance of ATR for each security independently when performing chart analysis. ATR is a nice chart analysis tool for keeping an eye on volatility which is a variable that is always important in charting or investing. It is a good option when trying to gauge the overall strength of a move or for discovering a trading range.
That being said, it is an indicator which is best used as a compliment to more price direction driven indicators. Once a move has begun, the ATR can add a level of confidence or lack there of in that move which can be rather beneficial.
Sets the number of decimal places to be left on the indicator's value before rounding up. The higher this number, the more decimal points will be on the indicator's value. Toggles the visibility of the indicator's name and settings in the upper left hand corner of the chart.
There are three calculation which need to be completed and then compared against each other. The True Range is the largest of the following: Therefore there should be no negative numbers.