Average True Range: What Makes it so Fantastic
The Average True Range was developed by J. Welles Wilder, and this is an indicator that he used in measuring volatility. Just like most of his indicators, he developed the ATR (Average True Range) with commodities and daily prices in mind. Although, we know that commodities behave more volatile when compared to stocks. It fails when trying to capture volatility gap or limit moves, based on a volatility formula on the high-low range. The missing volatility or gap is very important and Wilder designed te ATR just for this purpose. Whilst I proceed I must remind you that ATR does not provide an indication of price direction.
In his book titled “New Concept in technical Trading Systems”, Wilder included Parabolic SAR, ADX (Directional Movement Concept and Relative Strength index. Despite the fact that his ideas were old, it still stood the test of time and can still be used at this time.
He was able to start with a concept called True Range (TR), Wilder defined them it as the greatest of the following:
The difference between the current high and the current low
The difference between the current high and the previous close
The difference between the current low and the previous close
You can go on further to calculate the Average True Range over a set number of past periods. Investors should be weary of using adequate periods. It is wise that care is taken when using sufficient periods in the mean true ranges over a set number of past periods. It is also advisable that care is taken to use sufficient periods in the mean process so as results would be suitable.
When calculating our stop loss we could employ the use of Average True Range, this is achievable by subtracting a multiple of the mean true range from the entry price. It is possible that I take twice the value of my ATR and minus it from my entry price. If for instance you have a $2 stock and its ATR value was 10 cent, what I’ll do is to take a multiple of the ATR, and I’ll love us use four in this example and minus it from our entry price. Hence, four multiplied by our ATR is forty cents, subtract this value from our entry price gives us our stop loss value.
The Average True Range (ATR) is not only vital in setting up stop limits, but also it is helpful in determining entry/exit points for day and swing trading.
still you are just sharing the articles not the indicators with it if you wana really help us then plz share the article with the indicator so we can test it.
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