The Average True Range, or ATR, is a Technical indicator that measures the volatility in the price of financial instruments. ATR indicator was developed and introduced by J. Welles Wilder J. in his book, New Concepts in Technical Trading Systems.
The ATR tracks the price range of a security over a given period of time, typically 14 days. It is a measure of the volatility of the security. It Helps traders identify potential entry and exit points and determine proper stop-loss levels.
Table of Contents
Calculating ATR
Formulae
ATR = (Previous ATR * (n – 1) + TR) / n
Where:
ATR = Average True Range
n = number of candles or periods
TR = True Range
The True Range for today is one of the most significant of these:
- Today’s high, – today’s low
- The total value of today’s highest – yesterday’s closing
- The value of today’s low – yesterday’s closing
How Does the Average True Range (ATR) Indicator Work?
ATR moves up or down with the price moves of an asset. An increase in ATR suggests an increase in volatility in the price of the asset. At the same time, a decrease in ATR means a decrease in the volatility of the price of a security.
The ATR Indicator is plotted as a single continuous line on the charts and is simple to understand. It is important to note that the ATR is not directional. It doe not indicate the direction of the trend. The indicator only suggests levels of volatility in the price of an asset. In other words, an ATR Indicator shows how much an asset’s price can Move.
How to Use ATR Indicator?
Now that we know what the ATR indicator is and how it works. How can we use it while trading? You can use the It to help them identify when to enter and exit a trade.
Using ATR Indicator to Place stop loss Orders
The most common way of determining a stop loss order with an ATR indicator is to multiply it by 2
Suppose that you have taken a Long position at a price of 100 $; the value of ATR is 4. You can place a stop-loss order at 92,
Using ATR Indicator to determine Targets
Average True Range Indicator can also provide profit targets. For example, If the Security you are trading in has an ATR Value of 100, it moves 100 points in the given period. So you can expect a target around that range. It works even better when you combine it with price action.
Suppose you took a long position, and the possible 3 targets according to price action are 70.120,200 points away. And ATR is 100. You can set 70 as your target, as the rest 2 targets are highly unlikely because the value is greater than the ATR.
Conclusion
In conclusion, the Average True Range (ATR) is a powerful tool that can be used to help traders make smarter trading decisions. By understanding the concept of volatility, traders can use the ATR indicator to identify proper stop-loss points and when to enter and exit a trade. Additionally, the ATR can be used to identify Assets with high volatility and enhance their selection process.
