What Is Average factual Range (ATR): Formula, How to compute, and How to Use It

The average factual range (ATR) is a key indicator that traders use to assess economy volatility. The ATR doesn’t forecast worth path but rather helps traders comprehend the degree of worth fluctuations over a specific period. Developed by J. Welles Wilder Jr. in his 1978 book, recent Concepts in Technical market activity Systems, it’s particularly useful in distribute, derivatives, and forex market activity.

In this piece, we’ll respond some ordinary questions about the topic: What does ATR cruel? How to compute it? And perhaps most importantly, how to use average factual range effectively in your market activity strategies?

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What is ATR

The ATR focuses on providing a clearer picture of economy volatility by measuring the range between high and low prices, as well as any gaps from one market activity period to the next. Unlike some other indicators, the ATR doesn’t indicate the path of worth movements—it solely focuses on how much prices are moving, whether up or down.

This makes ATR particularly useful for traders who desire to adjust their strategies in response to changing economy conditions without relying on predictions about whether prices will rise or fall.

Instead, the ATR tells traders the extent of economy activity, giving insight into whether the economy is becoming more or less volatile. By evaluating this volatility, they can set appropriate stop-deficit levels, position sizes, and market activity strategies to manage hazard effectively.

The average factual range formula

The foundational component of the ATR calculation is the factual range (TR). It measures the range of worth movement for a given period and is defined as the greatest of the following three values:

1. Current high – current low: The difference between the highest and lowest prices of the current market activity period
2. Current high – previous close: The absolute difference between the current high and the previous closing worth, if the current high is greater
3. Current low – previous close: The absolute difference between the current low and the previous closing worth, if the current low is lower

Mathematically, this can be expressed as:

factual range (TR)=max(High−Low,∣ High−Previous Close ∣ ,∣ Low−Previous Close ∣)

Once the factual range values are calculated for each period, the ATR is determined by averaging these values over a specified number of periods, often referred to as “nnn periods.” This is done using a moving average, which smooths out the data to reflect a more consistent volatility assess.

The formula for calculating ATR is:

ATR=Moving Average of TR / n periods

The ATR uses a smoothing procedure, typically an exponential moving average (EMA), to compute the average of the factual range values. Unlike a straightforward moving average, the EMA gives more weight to recent observations, making it more responsive to recent worth changes. This way helps traders get a more accurate and up-to-date assess of volatility.

Example: Calculating ATR for a distribute over 3 days

To demonstrate how to compute the distribute average factual range using a shorter period frame, let’s walk through a hypothetical example using data for a distribute over three days.

1. Gather distribute data

Assume these are the high, low, and previous close prices for a distribute over three days:

• Day 1: High = $105, Low = $100, Previous close = $102
• Day 2: High = $108, Low = $102, Previous close = $105
• Day 3: High = $110, Low = $104, Previous close = $108

2. compute factual range (TR) for each day

Using the factual range formula:

TR=max(High−Low,∣ High−Previous Close ∣,∣ Low−Previous Close ∣)

compute TR for each day:

Day 1

TR calculation: max(105 – 100,

TR: 105 – 102

Day 2

TR calculation: max(108 – 102,

TR: 108 – 105

Day 3

TR calculation: max(110 – 104,

TR: 110 – 108

3. compute the ATR

• Sum the factual range values:

Sum of TR values=5+6+6= 17

• compute the average factual range:

ATR=Sum of TR values​/ Number of Days=17 / 3​=5.66

The ATR for this 3-day period is 5.66. This worth reflects the average volatility of the distribute over the specified ATR period.

How to use ATR in market activity

The average factual range is a valuable tool for traders, providing insights into economy volatility and helping in selection-making processes. Here’s how you can use it to enhance your market activity strategies:

Volatility analysis

By analyzing ATR values, traders can assess how much a distribute or property is likely to shift within a given period. High ATR values indicate high volatility, while low ATR values recommend more stable conditions. Understanding this volatility helps traders adjust their strategies to fit the current economy surroundings.

For instance, if ATR is high, you might anticipate larger worth swings and adjust your market activity way to accommodate the increased hazard.

ATR for stop-deficit orders

The ATR can assist you determine a stop-deficit level that accounts for an property’s volatility, reducing the hazard of being stopped out prematurely due to normal worth fluctuations.

For instance, if the ATR for a distribute is 5 points and you desire to set a stop-deficit order, you could place it at a multiple of the ATR below your entry worth. For a more conservative way, you might set the stop-deficit at 1.5 times the ATR below your entry worth, which would be 7.5 points.

This way accommodates volatility, allowing the distribute to fluctuate within a reasonable range without triggering the stop-deficit unnecessarily.

ATR-based exit strategies

ATR is also useful in developing exit strategies, such as trailing stops and taking profits.

• Trailing stops: You can use ATR to set trailing stops that adjust with the distribute’s volatility. For example, if the ATR is 5 points, you might set a trailing stop 2 times the ATR (10 points) below the highest worth achieved since entering the trade. As the worth rises, the trailing stop moves up, locking in profits while giving the trade room to develop.
• Taking boost: ATR can assist you determine optimal points for taking profits. By monitoring ATR, you can decide whether a distribute has reached a volatility threshold that suggests it’s period to realize gains. For instance, if the ATR worth indicates that worth movements are becoming more erratic, it might be a excellent period to secure profits and exit the position.

Day market activity and long-term strategies

Traders use ATR in various market activity strategies, from day market activity to long-term investing:

• Day market activity: Day traders use ATR to manage trades with short-term worth movements. High ATR values might prompt day traders to set wider stops and boost targets, reflecting the increased volatility.
• Long-term strategies: For longer-term traders or investors, ATR helps in setting stop-deficit levels and determining the volatility of an property over extended periods. This can navigator decisions about position sizing and hazard management over the life of an capital.

FAQs

What is ATR in stocks?

ATR in stocks, or average factual range, is a volatility indicator that measures the average range of worth movements over a specified period. It does not indicate the path of worth movement but provides insights into the level of economy volatility. By calculating ATR, traders can comprehend how much a distribute typically moves within a given timeframe, helping them manage hazard and set appropriate market activity strategies.

What does the average factual range inform you?

The average factual range tells you how much an property’s worth fluctuates over a specific period. It provides a assess of economy volatility, showing how much the worth of a distribute or other property has moved, on average, during the period analyzed. ATR helps traders assess the level of volatility and adjust their market activity strategies, such as setting stop-deficit orders and determining position sizes.

How to read ATR worth?

Reading ATR values involves understanding the magnitude of worth movements. A higher ATR worth indicates higher volatility, meaning the property experiences larger worth swings. Conversely, a lower ATR worth suggests lower volatility with smaller worth movements. Traders use ATR to assess economy conditions and make informed decisions about entry and exit points, as well as setting stop-deficit orders.

How to use ATR to receive boost?

ATR can be used to determine optimal points for taking boost by assessing the volatility of an property. Traders may set boost-taking levels based on a multiple of the ATR worth. For example, if the ATR is 5 points, setting a boost target at 2 times the ATR (10 points) above the entry worth can align with the property’s volatility. This way helps traders capture gains while accommodating the property’s typical worth fluctuations.

What is the ATR percentage indicator?

The ATR percentage indicator expresses the Average factual Range as a percentage of the property’s worth. It provides a relative assess of volatility, allowing traders to contrast the volatility of different assets or period periods on a standardized basis. To compute the ATR percentage, divide the ATR worth by the property’s current worth and multiply by 100. This helps traders comprehend how volatility impacts worth movements relative to the property’s worth level.