Average true range (ATR)

True range is the greatest of three quantities: the bar's high less its low, the distance from its high to the previous close, and the distance from its low to the previous close. The second and third exist so that a gap counts. A bar that opens well away from the previous close and then barely moves has a small high to low range and a large true range, and the second measure is the honest description of what happened. Average true range is the true range averaged over a chosen number of bars, conventionally with the smoothing method Welles Wilder specified rather than a simple mean.

It measures magnitude and nothing else. It rises when a market falls quickly exactly as it rises when a market climbs quickly, so it carries no directional content whatsoever. Its practical role is normalisation: because instruments move at very different scales, one common convention expresses stop distances and position sizes as a multiple of the instrument's own average true range, so that a comparable amount is at stake across instruments that look nothing alike. That is a convention for putting different markets on one footing, not a claim about what produces results.

Three limits are worth holding. The output is in the instrument's own price units, so two instruments cannot be compared until each is divided by its price. It is backward looking, so it reads low immediately before a scheduled event that has not happened and high immediately after one that has. And the two free choices, the lookback length and the smoothing method, change the number materially, so an average true range quoted without both is not reproducible.