How does the Average True Range indicator get calculated?

I'm having trouble understanding the ATR but have one big question about it.

In this graph here,

You can see the ATR for a 14-day period is ~\$2.78 as shown by the line graph. I just don't understand what the ATR's line graph is showing.

For example, is the ATR \$2.7864 when the price of the asset is \$135.14 (at the end of the graph) because the average range between high and low prices for the last 14 days was \$2.7864? (this is basic clarification, I'm unsure)

What is the rest of the line showing then? At the point between Aug 07 and Sep 07 on the graph, when the ATR is hovering around \$4, is this the ATR of the past 14 days before the midpoint between Aug 07 and Sep 07? I.E. is every given point on the ATR line graph the value of the ATR for the past 14 days at that given point? So the 14-day ATR at the point of Dec 07 is (eyeballing here but) \$3? And the 14-day ATR at the point of Jul 07 (again, eyeballing) \$2?

Or is each specific point on the ATR line graph the specific range between the high and low price of a stock for any single given day? And then do all these daily values then add up to the final ATR of \$2.7864?

To finish it off with one general example, at the beginning of the time period observed (May 07), the ATR seems to be around \$.60-\$.70. The ATR at the end of the time period observed (May 08) is \$2.7864. Assuming the point at May 07 measures the 14-day ATR and not the current range during the month of May 07, can we then conclude that the asset depicted in the price graph became more volatile over a year's span? Is this essentially what ATRs are useful for?

And then I guess if you only care about the ATR during May 08, can you use the ATR of \$2.7864 to assume that highs and lows during May 08 will generally stay close to \$2.7864?

Thank you!

1 Answer

Your questions can be best answered by setting up a spreadsheet that calculates the ATR for a set of data and graphing the results. That way, you can see the math of it all and refer to it when looking at the various movements of the ATR graph.

Here's a web site that provides a sample spreadsheet for the ATR. I've assumed that the formulas used are correct but you should verify that as well.