How To Use Average True Range (ATR)
The Average True Range (ATR) is a volatility indicator designed by J Welles Wilder and introduced to the market in 1978 with the release of his book ‘New Concepts in Technical Design’
The ATR tracks volatility and provides an indication of the market’s eagerness to commit to a particular commodity. Wilder constructed his ATR indicator, in the same way as his other indicators, by focusing on commodities and daily prices.
The ATR records the average of true price range over a set period of time. The true range is calculated using the greatest difference between today’s high and low; the difference between today’s high and open and between today’s low and open. The ATR is the moving average of true ran
High ATR readings indicate high volume levels and suggest that a major price reversal is imminent whilst low readings indicate low volumes and are associated with price flat-lining.
The Average True Range Indicator is an integral component of Wilder’s Directional Movement indicators
Wilder designed his Average True Range Indicator so that high values advised of potential market tops and bottoms whilst low values were indicative of conditions most suitable for range trading.
Wilder also advised that the Average True Range Indicator performed best using a 14 period together with longer time frames from the daily upwards. The central concept behind the ATR is that its low values advise of a poor trend direction whilst high values suggest that a trend breakout or breakdown is imminent.
Specifically, high Average True Range Indicator readings frequently occur after panic selling and buying resulting in either the formation of a market top or bottom. Low ATR values are representative of price consolidation periods.
Wilder did not use his usual construction methods when he designed the Average True Range Indicator and, as such, it does not take overbought or oversold conditions into its calculations. In fact, the ATR is not intended to provide definitive recommendations on new buy or sell trading opportunities.
However, the ATR’s main attribute is that, when it is registering very high readings, it is exceptionally good at advising that the market may be forming a top or bottom and that a reversal in the current direction of price could be imminent
The Average True Range Indicator has found its most useful function as an integral part of many trading strategies. This is because, although designers could create profitable strategies under stable conditions, they found that the performance of their strategies deteriorated significantly in times of increased volatility.
As Wilder designed his ATR to specifically deal with high volatility, introducing this indicator into the inherent design of their trading strategies enabled designers to dramatically improve their performance during volatile times.
For instance, if ATR is used, instead of constant numbers, to determine key parameters such as position and stop losses then a trading strategy was found to be able to cope much better with volatile times when price surges and breakouts were more prominent.
As such, the Average True Range Indicator is a powerful tool that can enable your trading strategy to be more accommodating and adaptive to changing levels of volatility.
Hi. i may be the only one who is interested in this. could you please show me how to set stop loss, trailing stop and determine breakout? thank you so much...
You might want to check out the Turtle trading rules from the famous Richard Dennis experiment...
ATR is a nice technical indicator that I use sometimes, but it is not the only one I use. The other ones I use are stochastic crossover, macd crossover and candlestick patterns.