Volatility – based on daily range
Developed by J. Welles Wilder in 1978
The Average true range indicator is a measure of a securities volatility. The indicator does not provide an indication of the securities price direction or duration, but the degree of price movement or volatility.
In order to accurately reflect the volatility associated with commodities, Wilder sought to account for gaps. A volatility formula based on only the high/low range would fail to capture the actual volatility created by the gap.
As a volatility-based indicator the ATR cannot predict price direction or duration, simply activity levels. Low levels indicate quiet trading (small ranges) and high levels indicate violent trading (large ranges).
Sharechart Default: 14 days
BHP Billiton Limited experienced a high reading on ATR in august 2002 signalling high volatility, which occurred before a market bottom. The price then rallied from above $8.30 to under $10.50 in four months (approx 20 - 25% gain).
In mid 2003 the market confirmed that bottom at approx $8.30, which was followed by a break of long term ATR trend and then a break of long term price trend at $10.50. The ATR indicator, throughout the rally from $8.30 to approx $12.20 headed higher (high volatility) once again – possibly edging towards a market top signal.