Chartered Market Technician (CMT) Practice Exam

The Average True Range (ATR) is the most applicable indicator when analyzing volatility. ATR measures market volatility by decomposing the entire range of an asset price for a given period. It does this by taking into account not just the high and low price of the asset, but also the previous closing price, which allows it to capture gaps in price movement.

When traders or analysts are interested in understanding how much an asset's price typically fluctuates over time—whether to assess risk, determine position sizing, or identify potential breakouts—ATR provides a numeric value that represents this price movement in a clear and actionable manner. The higher the ATR value, the higher the volatility, indicating that traders should be prepared for more significant price movements.

In contrast, the other indicators listed serve different purposes. A Simple Moving Average and an Exponential Moving Average are primarily used to identify trends rather than volatility, smoothing out price data over specified periods. Meanwhile, the Relative Strength Index (RSI) measures momentum rather than volatility, helping to identify overbought or oversold conditions. Thus, the focus of ATR on price variability makes it the most relevant tool for measuring volatility in market analysis.