Average True Range- ATR

Input Information

Name Expression Default Description

Market Synopsis

Table of Contents

Introduction to Average True Range (ATR)

The Average True Range (ATR) is a technical analysis indicator that measures volatility in the financial markets. It was developed by J. Welles Wilder Jr. and introduced in his book “New Concepts in Technical Trading Systems” in 1978.

Calculation of ATR

ATR is calculated using the following formula:

True Range = Max(High, Previous Close) – Min(Low, Previous Close)

Average True Range = [(n – 1) x Previous ATR + Current TR] ÷ n

Where ‘n’ is the number of periods used for the calculation.

Interpretation of ATR

The ATR value shows the average range of price movement over a certain period of time. Higher ATR values indicate higher levels of volatility and vice versa.

Uses of ATR

  • Identifying potential trend changes
  • Setting stop-loss orders based on volatility
  • Confirming breakouts
  • Determining position sizing and risk management strategies

Limitations of ATR

  • ATR only provides information on volatility, not directional movement
  • ATR can be affected by sudden price spikes or gaps
  • Using a fixed period for ATR calculation may not be suitable for all market conditions

Table of Contents:

  1. Definition
  2. Calculation
  3. Interpretation
  4. Use Cases
  5. Advantages
  6. Limitations

Definition:

The Average True Range (ATR) is a technical analysis indicator that measures market volatility by examining the difference between high and low prices of an asset over a specified period. It was developed by J. Welles Wilder Jr. in 1978.

Calculation:

To calculate the ATR, you need to find the true range (TR) first. The TR is the greatest of the following:

  • Today’s high minus today’s low
  • Absolute value of today’s high minus yesterday’s close
  • Absolute value of today’s low minus yesterday’s close

Then, calculate the average true range by taking the moving average of the TR over a specified time period. The most common period used is 14 days.

Interpretation:

The ATR is measured in the same units as the price of the asset being analyzed. It gives an indication of how much the price is likely to move up or down in the near future. Generally, a higher ATR indicates higher volatility and vice versa. Traders can use ATR to set stop-loss orders, determine position sizing or to confirm a trend.

Use Cases:

  • Setting stop-loss orders
  • Determining position sizing
  • Confirming a trend
  • Identifying potential breakouts and breakdowns

Advantages:

  • Provides a measure of volatility
  • Can be used to set stop loss orders more effectively
  • Helps traders identify potential trading opportunities
  • Can be customized to different time periods and asset classes

Limitations:

  • ATR does not provide any information about the direction of price movement
  • It can give false signals during periods of low volatility
  • It may not be suitable for all asset classes or timeframes
  • It is a lagging indicator, which means that it reacts to price changes after they occur

Plot Information

Number Name Default Color Description

Indicators

Fundamental Summary

    Coming soon!!

Technical Summary

Related Content

course

Trading Strategy : Momentum Trade

course

Tools for trading momentum

course

Momentum Tools

course

Momentum Trading Strategies

course

Introduction to Momentum Trading