Pathshala: (ATR) Average True Range

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<span style="font-family: "arial" , "helvetica" , sans-serif;">Average True Range (ATR)</span></h1>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjowzYmVe2bUDntpaV4sGDHpIYl1-AaFLUL50ZX9H8iOy67TtChlW417KdxqnhsAm-MgII1GctyG1DwgP0b2C3c7lN2LEK1c7ihelvyV4AAVfPTzoPSKzb-hnM45ss-SxWQfA4xp-Sr0Xk/s1600/AverageTrueRange.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="150" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjowzYmVe2bUDntpaV4sGDHpIYl1-AaFLUL50ZX9H8iOy67TtChlW417KdxqnhsAm-MgII1GctyG1DwgP0b2C3c7lN2LEK1c7ihelvyV4AAVfPTzoPSKzb-hnM45ss-SxWQfA4xp-Sr0Xk/s200/AverageTrueRange.png" width="200" /></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> <b><span style="color: #3333ff;">Introduction </span></b><br /><br />Developed
 by J. Welles Wilder<span style="font-family: "arial" , "helvetica" , sans-serif;"> </span>(1978)<span style="font-family: "arial" , "helvetica" , sans-serif;">.<span style="font-family: "arial" , "helvetica" , sans-serif;"> T</span></span>he Average True Range (ATR) indicator
 measures a security's volatility. As such, the indicator does not 
provide an indication of price direction or duration,  simply the degree
 of price movement or volatility.<br /><br />As with most of his indicators,
 Wilder designed ATR with commodities and daily prices in mind. In 1978,
 commodities were frequently more volatile than stocks. They were (and 
still are) often subject to gaps and limit moves. (A limit move occurs 
when a commodity opens up or down its maximum allowed move and does not 
trade again until the next session. The resulting bar or candlestick 
would simply be a small dash.) In order to accurately reflect the 
volatility associated with commodities, Wilder sought to account for 
gaps, limit moves, and small high-low ranges in his calculations. A 
volatility formula based on only the high-low range would fail to 
capture the actual volatility created by the gap or limit move.<br /><br />Wilder started with a concept called True Range (TR) which is defined as the greatest of the following:<br /><br />•The current High less the current Low.<br />•The absolute value of the current High less the previous Close.<br />•The absolute value of the current Low less the previous Close.<br /><br />If
 the current high-low range is large, chances are it will be used as the
 True Range. If the current high-low range is small, it is likely that 
one of the other two methods would be used to calculate the True Range. 
The last two possibilities usually arise when the previous close is 
greater than the current high (signaling a potential gap down or limit 
move) or the previous close is lower than the current low (signaling a 
potential gap up or limit move). To ensure positive numbers, absolute 
values were applied to differences.</span></div>
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<img alt="" border="0" height="269" id="BLOGGER_PHOTO_ID_5451400994977113650" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAVU_CTh6hk7_MFNmkTCixg8vNuEMpLqJZrJj0vd6riGn-dD4sz0AbXdTTW8nBifIUWhG6ZtPYn2H4zNwc5ai0cKMJ4g1zbR9ywKCP-l_6NiC7EtexeMav8y-ikX12LbH5Wkgxvatfnjs/s640/atr-example.gif" style="display: block; margin: 0px auto 10px; text-align: center;" width="450" /><span style="font-family: "arial" , "helvetica" , sans-serif;">The example above shows three potential situations when the TR would 
not be based on the current high/low range. Notice that all three 
examples have small high/low ranges and two examples show a significant 
gap.<br /><br />1.A small high/low range formed after a gap up. The TR was 
found by calculating the absolute value of the difference between the 
current high and the previous close. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">2.A small high/low range 
formed after a gap down. The TR was found by calculating the absolute 
value of the difference between the current low and the previous close. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">3.Even
 though the current close is within the previous high/low range, the 
current high/low range is quite small. In fact, it is smaller than the 
absolute value of the difference between the current high and the 
previous close, which is used to value the TR. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Note: Because the 
ATR shows volatility as an absolute level, low price stocks will have 
lower ATR levels than high price stocks. For example, a $10 security 
would have a much lower ATR reading than a $200 stock. Because of this, 
ATR readings can be difficult to compare across a range of securities. 
Even for a single security, large price movements, such as a decline 
from 70 to 20, can make long-term ATR comparisons difficult.<br /><br /><b><span style="color: #3366ff;">Calculation </span></b><br />Typically,
 the Average True Range (ATR) is based on 14 periods and can be 
calculated on an intraday, daily, weekly or monthly basis. For this 
example, the ATR will be based on daily data. Because there must be a 
beginning, the first TR value in a series is simply the High minus the 
Low, and the first 14-day ATR is the average of the daily ATR values for
 the last 14 days. After that, Wilder sought to smooth the data set, by 
incorporating the previous period's ATR value. The second and subsequent
 14-day ATR value would be calculated with the following steps:<br /><br />1.Multiply the previous 14-day ATR by 13.<br />2.Add the most recent day's TR value.<br />3.Divide by 14.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: x-large;"><b>Basic signals:</b></span> </span></h2>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-weight: normal;"> If today's high is above yesterday's high and 
today's low is below yesterday's low, then today's high-low price range 
is used as the true range (the first alternative above).</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"> </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If 
yesterday's close is greater than today's high or is less than today's 
low, then it signals a gap or limit move, and one of the other 
alternatives apply to determine the true range to use in calculating the
 ATR. At the beginning, the first TR value is simply the high minus the 
low, and the first 14-day ATR is the average of the daily TR values for 
the last 14 days. After that, the data is smoothed by incorporating the 
previous period's ATR value.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"> </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Strong trending moves, whether up or
 down, often include large price ranges or large true ranges, especially
 at the beginning of a move. Consequently, ATR can be used to help 
determine the enthusiasm behind a move or provide reinforcement for 
acting on a breakout.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Pro/con:</b> ATR provides a better gauge
 of a market's recent price range and volatility over a given period. 
However, for markets that trade continuously around the clock, a steady 
stream of prices may reduce the need for the ATR indicator. ATR also 
does not provide any guidance on price direction.</span></div>
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(ATR) Average True Range 28. (ATR) Average True Range

Average True Range (ATR) Introduction Developed by J. Welles Wilder (1978) . T he Average True Range (ATR) indicator measures a se...