Developed by J. Welles Wilder and introduced in his book, New Concepts in Technical Trading Systems (1978), the Average True Range (ATR) indicator measures a currency’s volatility. Wilder defined the true range (TR) as the greatest of the following:

• Current high less the current low.
• The absolute value of: current high less previous close.
• The absolute value of: current low less previous close.

The method of calculation ensures that significant gaps accompanied by small high/low ranges are not excluded when measuring volatility. The last two possibilities arise when the previous close is greater than the current high (potential gap up) or lower than the current low (potential gap down). Absolute values were applied to differences to ensure positive numbers.

Typically, ATR is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. The first 14-day ATR value is a simple average of the last 14 daily ATR values. Subsequent calculations would smooth the indicator by including the previous 14-day ATR value when calculating the current day’s ATR value.