Average True Range

295 views 0

What is Average True Range – ATR?

The average true range (ATR) is a technical analysis indicator that measures market volatility by decomposing the entire range of an asset price for that period. Specifically, ATR is a measure of volatility introduced by market technician J. Welles Wilder Jr. in his book, “New Concepts in Technical Trading Systems.”

The true range indicator is taken as the greatest of the following: current high less the current low; the absolute value of the current high less the previous close; and the absolute value of the current low less the previous close. The average true range is then a moving average, generally using 14 days, of the true ranges.

Paratica ATR Indicator

Paratica ATR Indicator

Key Takeaways

  • Average true range (ATR) is a technical indicator measuring market volatility.
  • It is typically derived from the 14-day moving average of a series of true range indicators.
  • It was originally developed for use in commodities markets, but has since been applied to all types of securities.

The Formula For ATR Is

The first step in calculating ATR is to find a series of true range values for a security. The price range of an asset for a given trading day is simply its high minus its low. Meanwhile, the true range is more encompassing and is defined as:

TR = max[(high – low), abs(high – closeprevious), abs(low – closeprevious)]

Paratica ATR Indicator - 2

Paratica ATR Indicator – 2


TRi = a particular true range; and

n = the period employed (which is usually 14 days).

How To Calculate ATR

Traders can use shorter periods than 14 days to generate more trading signals, while longer periods have a higher probability to generate fewer trading signals. For example, assume a short-term trader only wishes to analyze the volatility of a stock over five trading days. Therefore, the trader could calculate the five-day ATR. Assuming the historical price data is arranged in reverse chronological order, the trader finds the maximum of the absolute value of the current high minus the current low, absolute value of the current high minus the previous close and the absolute value of the current low minus the previous close. These calculations of the true range are done for the five most recent trading days and are then averaged to calculate the first value of the five-day ATR.

What Does Average True Range Tell You?

Wilder originally developed the average true range (ATR) for commodities, but the indicator can also be used for stocks and indices. Simply put, a stock experiencing a high level of volatility has a higher ATR, and a low volatility stock has a lower ATR. The ATR may be used by market technicians to enter and exit trades, and it is a useful tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction; rather it is used primarily to measure volatility caused by gaps and limit up or down moves. The ATR is fairly simple to calculate and only needs historical price data.

The use of the ATR is commonly used as an exit method that can be applied no matter how the entry decision is made. One popular technique is known as the “chandelier exit” and was developed by Chuck LeBeau. The chandelier exit places a trailing stop under the highest high the stock reached since you entered the trade. The distance between the highest high and the stop level is defined as some multiple times the ATR. For example, we can subtract three times the value of the ATR from the highest high since we entered the trade.

The average true range can also give a trader an indication of what size trade to put on in derivatives markets. It is possible to use the ATR approach to position sizing that accounts for an individual trader’s own willingness to accept risk as well as the volatility of the underlying market. (For a detailed example on how to use ATR for this purpose, read our article, Sizing A Futures Trade Using Average True Range.)

Example Of How To Use ATR

As a hypothetical example, assume the first value of the five-day ATR is calculated at 1.41 and the sixth day has a true range of 1.09. The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one and then adding the true range for the current period to the product. Next, divide the sum by the selected timeframe. For example, the second value of the ATR is estimated to be 1.35, or (1.41 * (5 – 1) + (1.09)) / 5. The formula could then be repeated over the entire period.

Limitations Of ATR

There are two main limitations to using the average true range indicator. The first is that ATR is a subjective measure – meaning that it is open to interpretation. There is no single ATR value that will tell you with any certainty that a trend is about to reverse or not. Instead, ATR readings should always be compared against earlier readings to get a feel of a trend’s strength or weakness.

Second, ATR also only measures volatility and not the direction of an asset’s price. This can sometimes result in mixed signals, particularly when markets are experiencing pivots or when trends are at turning points. For instance, a sudden increase in the ATR following a large move counter to the prevailing trend may lead some traders to think the ATR is confirming the old trend; however, this may not be the case.

Was this helpful?

  • Yvette says:

    I have read so many content on the topic of the blogger lovers but this post is actually
    a fastidious article, keep it up.

    21 April 2021 at 05:51
  • Hey there great website! Does running a blog similar to this take a large amount
    of work? I’ve very little knowledge of computer programming
    however I had been hoping to start my own blog in the near future.
    Anyway, if you have any suggestions or tips for new blog owners please share.
    I know this is off subject nevertheless I simply had to ask.

    Feel free to surf to my web blog; greatwall99 for ios

    21 April 2021 at 10:55
  • Veronica says:

    I am sure this piece of writing has touched all the internet visitors, its really really good paragraph on building up new webpage.

    Feel free to visit my web site: akaun test epicwin; Veronica,

    21 April 2021 at 11:22
  • I’ll right away take hold of your rss feed as I can not in finding your e-mail subscription link or newsletter service.
    Do you have any? Kindly permit me understand
    so that I could subscribe. Thanks.

    my blog – club suncity jackpot

    21 April 2021 at 11:23
  • This is really interesting, You’re a very skilled blogger.
    I’ve joined your feed and look forward to seeking more of your magnificent post.
    Also, I have shared your site in my social networks!

    Have a look at my website apl ntc33

    21 April 2021 at 11:50
  • Everyone loves it whenever people come together and share ideas.
    Great site, stick with it!

    My webpage :: joker123 ios download

    21 April 2021 at 13:00
  • Keep on writing, great job!

    My web blog – playboy2 company

    21 April 2021 at 13:11
  • I’ve been browsing online more than 2 hours today, yet I never found any interesting article like yours.
    It is pretty worth enough for me. Personally, if
    all website owners and bloggers made good content as you did, the
    web will be a lot more useful than ever before.

    my webpage ace333apk android

    21 April 2021 at 13:12
  • This is my first time pay a visit at here
    and i am actually impressed to read everthing at single place.

    Check out my site – calibet id test

    21 April 2021 at 13:13
  • Sweet blog! I found it while searching on Yahoo News. Do
    you have any tips on how to get listed in Yahoo News? I’ve
    been trying for a while but I never seem to get there!
    Appreciate it

    Visit my homepage :: download game mega88

    21 April 2021 at 13:41
  • Hello there! This post couldn’t be written any better! Reading through this post
    reminds me of my old room mate! He always kept talking about this.
    I will forward this page to him. Pretty sure he will have a good read.
    Thanks for sharing!

    Also visit my website – live 22 apk download

    21 April 2021 at 14:01
  • Greetings! Quick question that’s completely off topic.
    Do you know how to make your site mobile friendly?
    My site looks weird when viewing from my iphone.
    I’m trying to find a theme or plugin that might be
    able to correct this issue. If you have any recommendations, please share.
    Appreciate it!

    My web page – i1 wm casino (

    21 April 2021 at 14:54
  • I cannot say that this book can be a miracle, nevertheless can say that
    this book is outstanding. Search Engine Optimization is one area that happens to be important for businesses today.

    28 April 2021 at 14:51
  • This article is in fact a nice one it assists new web viewers,
    who are wishing for blogging.

    28 April 2021 at 17:12
  • Peculiar article, exactly what I wanted to find.

    30 April 2021 at 00:48
  • Hi my family member! I wish to say that this article is amazing, nice
    written and come with almost all important infos.
    I’d like to look more posts like this .

    6 May 2021 at 23:12
  • Now that the release is complete, need to submit it
    to various submission offerings. May also be simply in order to write with regards to their
    hobby. The final point speak about is the upkeep.

    7 May 2021 at 05:41
  • I take pleasure in, result in I found exactly what I used to be taking a look for.
    You have ended my 4 day lengthy hunt! God Bless you man. Have a nice day.

    7 May 2021 at 17:03
  • Cecelia says:

    Way cool! Some very valid points! I appreciate you penning this write-up and also
    the rest of the website is really good.

    8 May 2021 at 05:57
  • Alteshy says:

    buy cialis online

    12 May 2021 at 06:35
Leave A Comment