Average True Range (ATR)
The Average True Range (ATR) is an essential technical analysis indicator for investors seeking to measure market volatility. Introduced by J. Welles Wilder Jr. in his book “New Concepts in Technical Trading Systems,” the ATR provides a detailed overview of asset price fluctuations. For this reason, it is one of the most common tools in traders’ toolkits.
The basic concept behind the ATR is relatively straightforward: it measures the range of movement of an asset, thereby providing an estimate of the volatility of that period. This measurement is carried out by breaking down the entire price range of the asset. The calculation of the ATR considers the deviation between the high and low points, the absolute value of the difference between the low or high point, and the closing point of the chart for that interval.
Typically, the ATR is calculated as a moving average, commonly over 14 days. However, traders can adapt the length of this period according to their needs: shorter periods may generate more trading signals. In contrast, more extended periods provide less frequent but potentially more reliable signals.
For traders, using the ATR is not limited to merely measuring volatility. This indicator can be employed to optimise risk management, for example, by setting stop-loss orders more accurately. Additionally, it can be combined with other trading strategies to identify potential entry and exit points from the market.
In conclusion, the Average True Range is more than just a simple indicator; it is a useful guide for navigating financial markets with greater assurance.
Understanding and applying the ATR allows traders to make more informed decisions based on a deep understanding of volatility.
