Advanced Tools Plug-in:

ATR - Average True Range Indicator

The Average True Range Indicator (ATR) was developed initially to work with the commodity industry, however it has been found to be applicable to both the Stocks and Forex markets as well. The purpose of the ATR is to recognize the level of volatility in a market.

Volatility is a measurement of the change in price over a given period. It is often expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price.

When a market is going sideways it typically exhibits low volatility and is difficult to trade, whereas a market with higher volatility typically is trending better which would produce more opportunities to get into a trade.

Note: If a market’s volatility is too high, traders find that the market is too erratic and this situation also becomes difficult to trade. In adding the ATR as a tool, traders hope to measure the level of volatility to help them interpret the different markets they are watching. It is important to remember to consult other indicators or analysis so that you are not relying on only one indicator to determine market entry or exit.

Watch the Average True Range Indicator Video

The ATR’s value is a measurement of the market volatility. When a market is increasing in volatility the ATR will have a higher value, and when the market is decreasing in volatility the ATR will have a lower value.

Calculation

The ATR is a moving average of the “True Ranges” defined below. The default period interval in Track ‘n Trade is 5 days. The ATR is calculated based on the largest of the three distances from:

1. Today’s HIGH to today’s LOW
2. Yesterday’s CLOSE to today’s HIGH.
3. Yesterday’s CLOSE to today’s LOW.