Average True Range (ATR) is a technical analysis indicator that measures market volatility. It was developed by J. Welles Wilder and is commonly used by traders to assess the degree of price volatility in a financial instrument, such as a stock, commodity, or currency pair. ATR does not provide directional information; rather, it quantifies the degree of price fluctuation.

The Average True Range is calculated using the following steps:

1. **True Range (TR):** Calculate the true range for each period. The true range is the greater of the following:

– Current high minus the current low,

– Absolute value of the current high minus the previous close,

– Absolute value of the current low minus the previous close.

\[ \text{True Range} = \max(\text{High} – \text{Low}, |\text{High} – \text{Previous Close}|, |\text{Low} – \text{Previous Close}|) \]

2. **Average True Range (ATR):** Calculate the average true range over a specified number of periods (typically 14). The formula is often an exponential moving average (EMA) of the true range.

\[ \text{ATR} = \frac{\text{TR}_{\text{1}} + \text{TR}_{\text{2}} + \ldots + \text{TR}_{\text{n}}}{n} \]

where \( n \) is the number of periods.

ATR values are presented in the same units as the price of the financial instrument being analyzed. Higher ATR values indicate higher volatility, while lower values suggest lower volatility.

Key points about Average True Range (ATR):

1. **Volatility Measurement:** ATR is primarily used to measure volatility. Traders often use it to set stop-loss levels or to determine position sizes based on the expected price movement.

2. **Adaptability:** ATR adjusts to changing market conditions. During periods of high volatility, ATR values increase, reflecting the wider price swings.

3. **Comparative Analysis:** ATR values can be compared across different timeframes or financial instruments to identify periods of relative volatility.

4. **Trend Confirmation:** ATR is sometimes used to confirm the strength of a trend. Increasing ATR may indicate a strengthening trend, while decreasing ATR may signal a weakening trend.

5. **Setting Stop-Loss Levels:** Traders may use ATR to set stop-loss levels by placing stops at a multiple of the ATR away from the current price.

ATR is a versatile tool used in various trading strategies, including trend following, range-bound trading, and volatility-based strategies. It provides traders with a quantitative measure of market movement, helping them make informed decisions about risk management and trade execution.