In his book, New Concepts in Technical Trading Systems, Welles Wilder, Jr. uses a value know as true range in his directional movement calculations. He defines true range as the larger of the following:

The distance between today’s High and today’s Low.

The distance between today’s High and yesterday’s Close, or

The distance between today’s Low and yesterday’s Close.

AverageTrueRange is simply an average of the True Range values over a period of time.

Category:

Usage

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The AverageTrueRange tends to peak during periods of higher than average volatility and to bottom out during periods of lower than average volatility. The market tends to top out when Plot1 hits a new 18-bar High. The market tends to bottom out when the AverageTrueRange hits a new 18-bar Low.

Reference:

Wilder, Welles, Jr. New Concepts in Technical Trading Systems. Trend Research. McLeansville, NC