Welles Wilder described these calculations to determine
the trading range for a stock or commodity.
True Range is defined as the largest of the following:
- The distance from today's high to today's low.
- The distance from yesterday's close to today's high.
- The distance from yesterday's close to today's low.
Wilder included price comparisons among subsequent bars in order
to account for gaps in his range calculation.
The raw True Range is then smoothed (a 14-period smoothing is
common) to give an Average True Range (ATR). The True Range
can be smoothed using a variety of moving average types, including
Simple, Exponential, Welles Wilder, etc.
ATR measures a security's volatility. It does not indicate
price direction or duration, rather the degree of price
movement. Average True Range can be interpreted using the same techniques that are used with the other volatility indicators.
Wilder states that high values of ATR often occur at market bottoms following a sell-off. Low
ATR values are often found during extended sideways or consolidation
Several other indicators are built off True Range, including DI+/DI-,
ADX, and ADXR.