What is the ATR indicator? How To Calculate Average True Range

Periods of low volatility, defined by low values of the ATR, are followed by large price moves. How close together the upper and lower Bollinger Bands are at any given time illustrates the degree of volatility the price is experiencing. We can see the lines start out fairly far apart on the left side of the graph and converge as they approach the middle of the chart. After nearly touching each other, they separate again, showing a period of high volatility followed by a period of low volatility. If the market has gapped higher, equation #2 will accurately show the volatility of the day as measured from the high to the previous close. Subtracting the day’s low from the previous close, as done in equation #3, will account for days that open with a gap down.

And you can look at the average true range indicator value to set your profit target. The average true range (ATR) can be a powerful technical analysis tool. You’ll see it featured in the book “New Concepts of Trading” by J. If you’re going long and the price moves favorably, you can continue to move the stop-loss to twice the ATR below the price. After it has moved up, it remains there until it can be moved up again.

The ATR Advantage

The indicator can help day traders confirm when they might want to initiate a trade, and it can be used to determine the placement of a stop loss. The measurement of the average true range is 14-period based. 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 readings from a continuous line shows the change in volatility over time.

What Is Average True Range (ATR): Formula, How to Calculate, and How to Use It

In the screenshot below, the ATR and the STOCHASTIC indicator are used to show the difference between momentum and volatility. Whereas the ATR is used to measure volatility, the STOCHASTIC is a pure trend strength indicator. Traders often mistakenly believe that volatility equals trend momentum. However, volatility does not say anything about the trend strength or the trend direction. Volatility shows how much the price fluctuates back and forth. Above are examples of the ATR scans which help to confirm your trade decisions and also list the stocks which fulfill the criteria of the scans for that particular day.

While the ATR doesn’t tell us in which direction the breakout will occur, it can be added to the closing price, and the trader can buy whenever the next day’s price trades above that value. Bollinger Bands are well known and can tell us a great deal about what is likely to happen in the future. Knowing a stock is likely to experience increased volatility after moving within a narrow range makes that stock worth putting on a trading watch list. When the breakout occurs, the stock is likely to experience a sharp move. For instance, if the ATR for a stock is 5 points and you want to set a stop-loss order, you could place it at a multiple of the ATR below your entry price. For a more conservative approach, you might set the stop-loss at 1.5 times the ATR below your entry price, which would be 7.5 points.

Calculation

• Unlike some other indicators, the ATR doesn’t indicate the direction of price movements—it solely focuses on how much prices are moving, whether up or down.
• ATR helps traders evaluate the level of volatility and adjust their trading strategies, such as setting stop-loss orders and determining position sizes.
• N.B. This first value is the first in the time series (not the most recent) and is n periods from the beginning of the chart.
• But the ATR can also provide general information about the underlying level of volatility of a market or the average price range for a specific period.
• In 1978, he introduced the world to the indicators known as true range and average true range as measures of volatility.
• The ATR may be beneficial for trend-following trading, improve your understanding of market behavior, and may even help to optimize target placement to improve a trader´s winrate.

Any time frame, such as five minutes or 10 minutes, can be stock average true range used. The average true range (ATR) is a simple moving average (SMA) or exponential moving average of the true range. Traders can use shorter or longer timeframes based on their trading preferences.

Example 1: ATR Increasing for 3 days and ATR Decreasing for 3 days:

Alternatively, the trade is closed if the price falls and hits the trailing stop-loss level. Although Wilder originally developed the ATR for commodities, the ATR indicator can also be used for various other financial instruments, including stocks, cryptocurrencies, or indices. In short, an asset experiencing a high level of volatility has a higher ATR.

Below I set the ATR to 1 period which means that the ATR just measures the range/size of one candlestick. The ATR won’t show you if a stock’s trending the direction you want to trade. You can hold a swing trade for a few days, weeks, or maybe even months. The goal is to limit your loss on a trade in the event of an unexpected move in price.

How this indicator works

Any successful trading plan always comes down to risk management. How good the ATR is varies depending on the specific asset in question. However, if an asset typically maintains an ATR close to $1.18, we usually say it is performing normally. The value of this trailing stop is that it rapidly moves upward in response to the market action.

• Utilizing a target that is 150 or even 200 pips away from the daily open may provide a lower chance of successfully closing a winning trade because the market does not move as much typically.
• Knowing a stock is likely to experience increased volatility after moving within a narrow range makes that stock worth putting on a trading watch list.
• As an example of how that could lead to profits, remember that high volatility should occur after low volatility.
• By analyzing ATR values, traders can assess how much a stock or asset is likely to move within a given period.
• Welles Wilder Jr. in his 1978 book, New Concepts in Technical Trading Systems, it’s particularly useful in stock, futures, and forex trading.
• The ATR is a volatility indicator which means that it measures price fluctuations.
• J. Welles Wilder created the ATR and featured it in his book New Concepts in Technical Trading Systems.

The highlighted areas on the price chart below show periods during which the ATR is above the EMA. Interestingly, different markets may provide different characteristics when it comes to the manifestation of volatility during trending markets. During the second highlighted phase, the price was in a downtrend. The STOCHASTIC confirmed the strong bearish trend strength and it dropped below the 20 line. This time, however, the candlestick wicks were much larger during the bearish trend and the trend was not as orderly as in the previous bullish trend.

It empowers retail investors to identify investment opportunity with all the necessary data and analytics. ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break. The markets are ever-shifting from hot to cold and back again.

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ATR in stocks, or average true range, is a volatility indicator that measures the average range of price movements over a specified period. It does not indicate the direction of price movement but provides insights into the level of market volatility. By calculating ATR, traders can understand how much a stock typically moves within a given timeframe, helping them manage risk and set appropriate trading strategies.

On the other hand, during periods of sustained sideways movement, volatility is frequently low. Targeting price levels at, or close to, the ATR bands may improve target placement for trend-following traders. The ATR can be a great confluence for trend-following traders in such a case. Although the ATR is not a trend-following tool, changes in volatility can point to changes in market behavior. The price was in a bullish trend during the first highlighted phase.

The Average True Range values imply lower price volatility. If the Average True Range value remains low for some time, it may indicate the possibility of a trend reversal, or continuation move and an area of consolidation for the stock. Every trading approach should be accompanied by its personalized risk management protocol. One such protocol (or indicator) is the average true range. Changes within the average true range show a change in volatility. You’ll see this with a sharp rise and fall in price action.