What it is and how to use it
What is it?
The Average True Range (ATR) is a volatility indicator that measures the degree of price movement in a market. Unlike other indicators, ATR does not indicate price direction but rather the level of price volatility. Traders use ATR to set stop-loss levels, identify breakouts, and gauge market volatility.
Who made it?
The ATR was introduced by J. Welles Wilder in his 1978 book, "New Concepts in Technical Trading Systems." Does the name sound familiar? Yep, it's the same Wilder who developed the Relative Strength Index (RSI) and the Parabolic SAR.
How is it calculated?
The ATR is calculated using the following steps:
True Range (TR): The maximum of the following:
Current High - Current Low
Current High - Previous Close
Current Low - Previous Close
Average True Range (ATR): The moving average of the True Range over a specified period.
The formula for ATR is:
ATR=Moving Average(TR,n)
Where:
TR is the True Range.
n is the lookback period.
Code (ProRealTime)
How do you use it?
You can use the ATR indicator in several ways to make trading decisions:
Setting Stop-Loss Levels:
Traders often use ATR to set stop-loss levels that account for market volatility. A common technique is to place stop-loss orders a certain multiple of the ATR away from the entry price to avoid being stopped out by normal market fluctuations.
Identifying Breakouts:
ATR can help identify breakouts. When the ATR rises, it indicates increased volatility, which often accompanies breakouts from price ranges or chart patterns.
Gauging Market Volatility:
Use ATR to measure market volatility. A high ATR indicates high volatility, while a low ATR indicates low volatility. This can help traders choose appropriate trading strategies and position sizes.
The ATR is also a key component in the calculation of other indicators, such as the Keltner Channel, Chandelier Exit, and the SuperTrend Indicator.
FAQ
Q: Is ATR a leading or lagging indicator?
A: ATR is a lagging indicator. It measures market volatility by calculating the average range between high and low prices over a specified period.
Q: What are the best settings for ATR?
A: The default setting for ATR is 14 periods. You can adjust this based on your trading style and the asset being traded to better capture volatility.
Q: How can ATR be used to improve trading?
A: ATR can be used to set stop-loss levels, determine position sizes, and filter trades based on volatility. It helps you manage risk and adapt your strategies to changing market conditions.
Strategies using the ATR indicator
None so far.
Comments