Average True Range (ATR)
The use of average true range (ATR) does identify volatility. However, it can be adjusted so that selection of ranges and dates can easily create a desired result. With this in mind, ATR should be used as a comparative indicator to confirm other signals. ATR was developed in the late 1970s by J. Welles Wilder to demonstrate how growing and shrinking breadth of trading is reflected in volatility.1
Key Point
ATR can be modified to create a desired result. So confirmation bias should be kept in mind when using this indicator.
The indicator points to a high likelihood of volatility at price tops and bottoms, in a manner similar to momentum indicators such as RSI. The assumption with ATR is that when the index is mid-range, ...
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