# What Is Average True Range ATR?

Assume that a trader wants to buy stock XYZ and has a trading account with $10,000. Based on their risk management strategy, they have determined that they are willing to risk 2% of their account on this trade. ATR can also be used to identify potential trend reversals or confirm the strength of a trend. A sudden increase in ATR may indicate a potential trend reversal, while a sustained increase in ATR over time may indicate a strong trend.

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. I mentioned that you take the true range of price and average it out over a specified time to calculate the ATR.

Gaps is very common in commodities due to their nature being affected by weather forecasts, supply reports, production forecasts, etc. Gaps can easily affect the basic indicators like moving averages, oscillators, etc. By using true range as oppose to just the bar range, the extra volatility caused by the gaps can be systematically incorporated into indicator calculations.

## Why You Can Trust Finance Strategists

The average true range stop adjusts to consolidation spots or abrupt price movements, triggering the strange movement of prices in both increasing and descending directions. The manifold of average true range can be used to track the abnormal price movements. In summary, the Average True Range is a valuable technical indicator for measuring market volatility and managing risk.

- Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
- Average true range (ATR) is an unpredictability pointer that shows how much an asset moves on average during a given period.
- Although the ATR is not a trend-following tool, changes in volatility can point to changes in market behavior.
- A high ATR value indicates that the asset is experiencing greater price movement over a specified period, while a low ATR value indicates less volatility.

This is in stark contrast to other trend and momentum indicators such as the RSI or the STOCHASTIC indicator. This is also why the ATR may be a great additional confluence tool to provide a different way of looking at price movements stock average true range and complement your price analysis. For the table below, the figures have been used to calculate a 14-day ATR over a 10-day period. The true range for each day was calculated as described in the bullet points above.

## Calculating the Average True Range Indicator

There is nothing magical with the calculation of the average range. It is a good measure of the price volatility over the period covered by the average. When the average range is rising, you know volatility is increasing, and vice versa. Keltner Channel uses the Average True Range to determine the channel distance. The channels are typically set two Average True Range values above and below the 20-period exponential moving average. Such insights can be very valuable to traders when it comes to optimizing their decision-making.

This is because, by tracking volatility in a given time frame, ATR shows when price movements might become more or less sporadic as volatility increases or decreases. Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. Because there must be a beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the average of the daily TR values for the last 14 days. After that, Wilder sought to smooth the data by incorporating the previous period’s ATR value. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current period’s high is above the prior period’s high and the low is below the prior period’s low, then the current period’s high-low range will be used as the True Range.

## What Does the Average True Range Tell You?

Average True Range Percent (ATRP) expresses the Average True Range (ATR) pointer as a proportion of a bar’s closing price. ATRP is used to calculate instability just as the Average True Range (ATR) indicator is. ATRP permits securities to be compared, while ATR does not permit the same. The main difference between the two indicators is the fact that the Average True Range also includes gaps. Well, by using the Average True Range we can incorporate the volatility determined by a gap. The Average Daily Range is also useful in determining the strength of a trend.

## Average Range vs. Average True Range – Which one is better?

The average daily range will be plotted as a number on your screen. A viable strategy would be to search for low volatility levels, in order to find a trade in the direction of the main trend. Average True Range doesn’t tell the trader anything about market direction.

Changes in volatility often also may foreshadow changes in trending behavior. Furthermore, trend-following traders may also be able to optimize their target placement by using the ATR-based Keltner channel. In the screenshot below, the price broke above the resistance zone first.

After that, to achieve each subsequent average true range you would multiply the previous 14-day ATR by 13, add the most recent day’s true range and then divide the result by 14. As an example of how that could lead to profits, remember that high volatility should occur after low volatility. We can find low volatility by comparing the daily range to a 10-day moving average of the range.

## Learn to trade

Volatility measures the strength of the price action and is often overlooked for clues on market direction. Welles Wilder, is a very useful tool in measuring volatility. The average true range measures the price range of a security/stock – the higher the volatility of a security the higher the ATR. The Average True Range (ATR) is a tool used in technical analysis to measure volatility. Unlike many of today’s popular indicators, the ATR is not used to indicate the direction of price. Rather, it is a metric used solely to measure volatility, especially volatility caused by price gaps or limit moves.

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