ATR - Average True Range

Technical Analysis - Indicators of Technical Analysis
Average True Range, compared to the others, is a kind of different indicator. It is often used to compute other technical indicators, as a part of their calculation (ADX, RSI etc.). However it is especially used to estimate the appropriate Stop Loss level.

 

ATR was created by J. Welles Wlder in 1978. It was ment to be used especially for the futures trading. The Futures market is usually more unstable and volatile than the Stock market is. Nowadays it is used successfully on dynamically changed markets, like the Forex is.

ATR determines the value of average price range. The more volatile the market is, the higher ATR value we get and vice versa. Generally we can also say, that the higher the ATR value is, the more probable is the changing or slowing of the current prevailing trend.

 

ATR Calculation:

Today's High – Yesterday's Low

ABS (Today's High – Previous Close)

ABS (Today's Low – Previous Close)

 

Which is the highest one?

 

The ATR indicator itself is calculated as the 14-days moving average from the highest daily values. The 14-day period is default but not constant value. Its changing to higher or lower values is a matter of the trader himself, his preferences as well as the market and time periods he is trading.


Average True Range ATR

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It is possible to calculate the ATR on daily, weekly or monthly basis etc. Depending on the fact which period do we use for trading, the period for ATR calculation can be chosen. E.g. the 14-"days" period for ATR averaging is in fact 3.5 hours, if we trade 15-minutes periods (14 x 15 min = 3.5 hour).

In the end: J. W. Wilder recommended to use 14-days Exponential moving average. But as we have mentioned before, the period for ATR averaging is better to choose according to the market we trade and to our own preferences.
 

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