The Average True Range (ATR), like Bollinger Bands, is a measure of volatility.

It’s another J Welles Wilder production, starting with an index he called the True Range, defined as the greatest of the following 3 values:

Current High – the current Low
Absolute value of (current High – previous Close)
Absolute value of (current Low – previous Close)

The Average True Range is commonly calculated using 14 periods. See the chart below, showing a period of level trading, relatively low volatilitiy, followed by a down trend and higher volatility. Standard Bollinger bands are also plotted.

The indicator can also be smoothed by including the ATR for previous time periods, ie.

Multiply previous 14-period ATR by 13,
Add the most recent TR,
Divide by 14.

ATR was designed with particular reference to commodity markets, usually more volatile than stocks, and also subject to limit moves (when a commodity opens above or below its maximum permitted move and is therefore suspended for the session).

One question that could be asked in reference to the forex market, is what does the ATR do, that isn’t done much more efficiently and revealingly than Bollinger bands…?