Average True Range is a stock volatility measure developed by Welles Wilder in his book “New Concepts in Technical Trading Systems”. The goal of the indicator is to find the “true” movement range for a stock in order to assess its volatility.
The calculation of the True Range (TR) is:
TR = The maximum of:
- Current High – Current Low
- Yesterday’s close – Current High (Absolute value)
- Yesterday’s close – Current Low (Absolute value)
The ATR is usually a 14 days average of the TR value.
In Option Samurai we add the ATR measure as a percent of stock price to help users understand the volatility of the stock, especially when comparing to break even points.
The idea is that the higher the ATR compared to the break-even point the greater the chances of profit (even on an intraday basis). In addition, you can scan the results to find only the trades where the ATR is significantly (2x,3x,4x etc) is greater than the break-even point.
You can read more about the edge of trading with ATR here: http://blog.optionsamurai.com/the-edge-of-trading-with-atr/
UPDATE: You can see more about this topic here: http://blog.optionsamurai.com/using-atr-when-trading-options/