ATR (Average True Range)
The ATR or average of the true range is an oscillator-type stock indicator created by J. Welles Wilder that is used to predict the future evolution of a financial asset through the measurement of price volatility.
The ATR offers the investor buy and sell signals based on daily volatility, taking into account the dispersion of prices in a normal trading session with respect to the average price.
Generally, the estimation of the volatility measurement is made based on normal days where the movements in prices are not excessive, therefore, there is a mathematical flaw in the concept since it does not measure the complete probability distribution, taking into account days. where the price moves more aggressively, due to important news affecting the financial markets. In addition, volatility can change a lot due to the elasticity in the movement that prices can have in situations that are difficult to predict and that cannot be controlled such as the appearance of an attack, an earthquake, wars or floods.
The ATR is calculated and measured taking into account the largest (bull market) or smallest (bear market) value in the search for the true range through an average of X sessions taking into account the following variables:
- Today's high minus today's low.
- Today's high minus yesterday's close.
- Yesterday's close minus today's low.
It is important to mention that the indicator does not predict the direction of the price but it does try to measure its volatility. Also, the most common calculation periods used are those of 14 and 20 sessions.
It is calculated with the following formula:
Interpretation of the ATR
Its most common uses are the following:
- Calculate the size of the position since it measures the movement of prices from maximum to minimum with respect to the average price and allows to calculate the range in which the price is going to move and, therefore, measure the leverage and define adequate management monetary.
- Identify the stops and their distance with respect to the price and in this way, avoid that they are placed too close together, getting to be executed. At the same time, it is a good tool to define price profit objectives since it is possible to know the approximate movement that it may have.
The ATR is a useful tool to know how much the price of a financial asset moves in the range from the minimum prices to the maximum prices with respect to the average price of a trading session and, therefore, it can allow to anticipate future movements in the price range of that financial asset.
Tags: finance ranking markets