Average True Range (ATR)
Candlefocus EditorAs its name implies, the ATR measures the average range of price movement over a specified timeframe and is usually traded in the 14-day simple moving average. Generally, a high ATR reading signals increased volatility, while a low reading signals decreased volatility. In order to interpret an ATR reading, it is important to consider the time frame and context of the chart where the indicator is placed.
ATR is a valuable tool for traders because it helps them to gauge the potential magnitude of a price movement, identify potential trend changes and spot overbought and oversold conditions in the market. The ATR is a great indicator for those looking to dive deeper into analysis, as the indicator can be used in different ways when evaluating markets. Specifically, traders can use the ATR to identify breakouts, range-bound markets, possible reversal signals or all-time highs and lows.
Essentially, the ATR helps traders establish the average daily price movement of a particular stock, commodity or currency and is usually used in combination with other technical indicators. By monitoring the ATR, traders can gain insight into the direction of the current trend and can adjust cash management accordingly. Two other popularly observed methods for using the Average True Range involve establishing a stop loss or take profit level; both of these can be calculated by multiplying the ATR by a certain value.
In conclusion, the Average True Range (ATR) is a versatile and reliable indicator for traders to use in analysing the markets. Although the data provided by the ATR can be seen as lagging, the indicator clearly displays the level of volatility in the market and can be used to set stop and take profit levels. When used in conjunction with other technical indicators, the Average True Range can provide a fuller picture of market sentiment and potentially alert traders to any bullish or bearish trends.