ATRn

ATRn refers to the Average True Range calculated with a period parameter n, a volatility indicator developed by J. Welles Wilder Jr. It measures the magnitude of price movements over a specified window and does not indicate direction, only how much prices tend to move.

Calculation begins with the True Range for each period t. Let H_t be the high, L_t the low, and C_{t-1} the previous close. TR_t = max(H_t - L_t, |H_t - C_{t-1}|, |L_t - C_{t-1}|). The first ATR value is typically the simple average of TR_1 through TR_n. After that, ATR values are smoothed for subsequent periods using Wilder’s method: ATR_t = (ATR_{t-1}*(n-1) + TR_t) / n. Some implementations substitute an exponential moving average with a different smoothing factor, but Wilder’s formula is the traditional choice for ATRn.

In use, ATRn provides a sense of market volatility over the chosen horizon. Traders often apply it to position sizing, risk management, or trailing stops. For example, a trader might set a stop distance as a multiple of ATRn, such as stop = entry price ± k*ATRn, to adapt to current volatility. Since ATRn is non-directional, it complements trend indicators rather than replacing them.

Limitations include lag due to smoothing, sensitivity to the chosen period n, and potential distortion by price gaps. ATRn does not predict price direction and should be interpreted alongside other analytical tools. Commonly used period values include 14 and 20, but the choice depends on the trader’s horizon and strategy.