ATR is the Average True Ranges over a specific period. ATR measures volatility, taking into account any gap in the price movement. Typically, the ATR calculation is based on 14 periods, which can be intraday, daily, monthly, or weekly.
Average True Range (ATR) is a price volatility indicator showing the average price variation of assets within a given time period. Investors can use the indicator to determine the best time for trading the average true range also take into account the gaps in the movement of price.
Calculating The Average True Ranging Indicator
The calculation of the average true range is 14-period based. The period can be intraday, daily weekly, or monthly. For Example, a new average true range is calculated every day on a daily chart and every minute on a one-minute chart. When plotted, the reading form a continuous line that shows the change in volatility over time. For calculating the average true range, a series of true ranges needs to be calculated first. For a specific trading period, the true range is the maximum of absolute values of the following:
1. Current High- Current Low
2. Current Low- Previous Close
3. Current High- Previous close
An average is taken for the recorded values of each period using the number of periods as 14. It gives the value of the average true range. The initial 14 period average true range value is calculated using the method explained above. For subsequent 14-period average true ranges, the following formula is used. Current Average True Range=[Prior Average True Range*13+ Current True Range] / 14 Average True Range and Trading- The Price volatility indicate by the average true range can be used by traders to determine the appropriateness of a trade.
Suppose that the trading range for a stock is 1.40, and the stock’s moved up 40% above the range. In such a case, an investor will get a buy signal. However, the price of the stock’s already risen above the average; hence it is not advisable to assume that the price will rise further. As the stock price is significantly higher than the average, there is a high possibility that the price will fall. Therefore, it is better to short sell provided the investment strategy of the investors shows an appropriate sell signal. The average true range values are useful for entry and exit triggers. However, they should not depend only on the average true range, rather it should be used along with a strategy to determine suitable trades. Moreover, an investor should also review historical readings of average true range to examine the current price movements. The value of the average true range changes and generally falls during the day. Nonetheless, it provesa satisfactory approximation of the price variations and the time that will take for the movements.