The Average True Range (ATR) is a technical analysis indicator that measures the volatility of an asset’s price over a given period of time. It was developed by J. Welles Wilder Jr. and was first introduced in his book “New Concepts in Technical Trading Systems” in 1978.
Average True Range (ATR) Calculation:
The formula for calculating the Average True Range (ATR) is as follows:
- First, calculate the True Range (TR) for each period. The TR is the biggest of the following:
a. The difference between the current high and the current low.
b. The absolute value of the difference between the current high and the previous close.
c. The exact value of the difference between the current low and the previous close.
- Calculate the Average True Range (ATR) over a specified period of time (n) by taking the average of the TR values for each period. The formula for ATR is:
ATR = [(ATR n-1 * (n – 1)) + TR] / n
- ATR n-1: the ATR value for the previous period.
- n: the number of periods used in the calculation (usually 14).
- TR: the True Range for the current period.
The first ATR value is usually calculated as a simple average of the TR values for the first n periods, as there is no previous ATR value to use in the calculation. After the first ATR value is calculated, the formula above is used for subsequent calculations.
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What information does ATR provide?
The ATR indicator provides information about the volatility of a stock’s price movements over a given period of time. Specifically, it tells you how much the price of an asset has moved on average during a given period of time. Here are some ways that the ATR indicator can be used:
- Volatility: The ATR can help you determine the level of volatility of an asset. A higher ATR value indicates that the asset is more volatile and the price is moving more, while a lower ATR value indicates less volatility and more stability.
- Stop loss: The ATR can be used to set stop loss levels. Traders often use the ATR to determine how far away from the current price they should place their stop loss orders to avoid being stopped out prematurely due to market noise or normal volatility.
- Trend reversal: The ATR can also be used to identify potential trend reversals. A sudden increase in the ATR value may indicate that the trend is changing or that there is increased volatility in the market.
- Trade sizing: The ATR can be used to determine the appropriate size of a trade. Traders often use the ATR to calculate the potential risk of a trade and adjust their position size accordingly.
How to use Average True Range (ATR)?
The Average True Range (ATR) indicator can be used in various ways to inform trading decisions. Here are some ways to use the ATR:
- Determine Stop Loss Levels: The ATR can help you determine the appropriate level for setting stop loss orders. By multiplying the ATR value by a certain multiple (such as 2 or 3), you can determine a reasonable distance away from the current price to place your stop loss order. For example, if the ATR value is 1.50 and you decide to use a multiple of 2, you would set your stop loss 3 points away from the current price.
- Assess Volatility: The ATR can be used to assess the level of volatility in a particular market. A high ATR value indicates that there is more volatility, while a low ATR value indicates less volatility. This can help traders identify market conditions that may be more or less conducive to trading.
- Determine Trade Size: The ATR can also be used to determine the appropriate trade size. By calculating the potential risk of a trade based on the ATR value, you can adjust your position size to ensure that you are not taking on too much risk.
- Identify Trend Reversals: The ATR can be used to identify potential trend reversals. If the ATR suddenly increases, it may indicate that there is increased volatility in the market or that the trend is changing.
- Confirm Breakouts: The ATR can also be used to confirm breakouts from key support and resistance levels. If the ATR value increases after a breakout, it may indicate that the breakout is genuine and that the price is likely to continue moving in the breakout direction.
Overall, the ATR indicator can be a useful tool for traders to help them make informed trading decisions based on market volatility.
Download Average True Range (ATR) For Amibroker (AFL)
_SECTION_BEGIN("ATR"); periods = Param( "Periods", 15, 1, 200, 1 ); Plot( ATR(periods), _DEFAULT_NAME(), ParamColor( "Color", colorCycle ), ParamStyle("Style") ); _SECTION_END();
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