It is also similar to the discussion about the "best" period length.
If you are familiar with trading strategies based on moving averages, it is very similar to the SMA vs. But personally I find the selection of particular method less important than simply knowing what you are using and using it consistently. Of course, different methods lead to slightly different behaviour of ATR and may have strengths and weaknesses, depending on the particular purpose, trading style, and market conditions. However, there is no such thing as "correct" or "incorrect" calculation method and none of the methods is universally more profitable than the others when using ATR as part of the investment decision making process. Welles Wilder, use Wilder's smoothing method. If you are looking for the "original" ATR, as presented by J.
In various resources you will find that one of the methods is the "right one" and the others are "incorrect". It has the same logic as exponential moving average (puts greater weight on the most recent bars), from which it only differs in the exact calculation of the smoothing factor:įor detailed guide to calculating all the three methods in Excel, see the ATR Excel tutorial. Welles Wilder (explained in his book New Concepts in Technical Trading Systems, page 23). This is the method originally used for ATR calculation by ATR inventor J. To calculate first ATR (when you don't have previous bar's ATR), just use the simple moving average method (arithmetic average of first n bars). The smoothing factor a is the weight of the current bar's true range and 1 – a is the weight of the previous bar's ATR. a is the smoothing factor, which is a function of the period length n:.ATR 1 is ATR calculated for the previous bar.Simple moving average in the calculator) is mathematically arithmetic average – the sum of last n bars divided by n:Įxponential moving average puts greater weight on the most recent bars and smaller weight on older bars: There are several different methods for that and the three most common are the following: Once you have calculated true range for each bar, the next step is to calculate the average of these, which is the ATR that we want. where H, L, C 1 are high, low, and previous close, respectively.įor more detailed explanation of true range and some graphical examples, see True Range and How It Differs from Range. High minus low (like traditional range).If you want to understand and calculate ATR, you first need to understand and calculate true range, which is the greatest of these three: Average True Range, as its name suggests, is the average of true range.
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