Average True Range (ATR)

Average True Range (ATR)

The average true range, or ATR, is the average among the true ranges for the time frame in question. By taking into consideration any differences in the value shift, ATR determines turbulence. The ATR calculation normally uses 14 periods, which can vary throughout the duration of a single day on a daily basis, every week, or every month. 

What is ATR? 

A measure of volatility in prices that displays the typical cost fluctuation for assets over an interval of time is called ATR. The signal can be used by traders to choose the ideal trading period. The discrepancies in the market movement are also taken into consideration by calculating the mean true range. 

  • The monetary fluctuation of commodities over a certain time period is indicated by the mean of their true range. 
  • Typically, 14 periods are used to determine average true range estimates. The time frame can be intraday, each week, every month, or maybe daily. 
  • A greater than average true spread value indicates considerable pricing variability of the property, whilst a low figure indicates minor price changes. 

Understanding ATR 

The ATR indication oscillates upward and downward as a security’s price changes grow or shrink. With each passing time interval, a fresh ATR measurement is computed. Each minute, an additional ATR measurement is computed and shown in a single-minute display. A fresh ATR is computed each day and plotted on an ongoing display. To help traders understand how turbulence has evolved over the years, each of these numbers is shown on a chart that looks like an uninterrupted line. 

One needs to calculate a number of consecutive true ranges, or TRs, in order to determine an ATR at the current time. The largest number generated by the ones that follow will constitute the true value for the current including: 

  • The low and high for today is the conclusion of yesterday 
  • Minimum minus for today is the end of yesterday 
  • The low maximum for today’s current weak 

Understanding ATR 

The ATR indication oscillates upward and downward as a security’s price changes grow or shrink. With each passing time interval, a fresh ATR measurement is computed. Each minute, an additional ATR measurement is computed and shown in a single-minute display. A fresh ATR is computed each day and plotted on an ongoing display. To help traders understand how turbulence has evolved over the years, each of these numbers is shown on a chart that looks like an uninterrupted line. 

One needs to calculate a number of consecutive true ranges, or TRs, in order to determine an ATR at the current time. The largest number generated by the ones that follow will constitute the true value for the current including: 

  • The low and high for today is the conclusion of yesterday 
  • Minimum minus for today is the end of yesterday 
  • The low maximum for today’s current weak 

ATR formula 

A metric used in financial analysis known to be the ATR gauges the rapidity of price movement for a commodity or securities. J. Welles Wilder published in New Concepts in Technical Trading Systems in the year 1978, which contained an introduction to ATR. 

  • The ATR equation is [(Prior ATR x(n-1)) + Present TR]/n, wherein TR = maximum [(high low), abs(high earlier closure), abs(low – earlier closure)]. 
  • ATR readings are typically computed during intervals of 14 days. In addition, traders utilise it to calculate volatility throughout any given time window, from intraday to longer time periods. 
  • A large ATR value denotes strong volatility, whereas a small ATR value denotes moderate unpredictability or a stagnant market. 

Calculating the Average True Range Indicator 

The ATR, which can be computed intraday, on a daily, weekly, or monthly basis, usually relies on 14 periods. The ATR is determined by daily information for the case.  

The initial 14-day ATR reflects the mean of all the everyday TR readings for the previous 14 days. The initial TR value represents the highest value less the lowest value as there has to be a starting point. Wilder then attempted to soften the information by including the ATR number from the prior session. 

Depending on when you start your computations, TR numbers change. The initial ATR is the mean of one of the 14 True Range numbers, while the initial True Range value was just the present High less the present Low. 

Interpreting the ATR Indicator 

  • A rising ATR and more varied bars are indicators of escalating price volatility. An increase in ATR reveals the severity of a price decline. ATR is not unidirectional, therefore a rising ATR could indicate either demand for selling or demand to purchase. Large ATR readings often follow a sharp rise or slump and are not expected to persist for very long. 
  • A low ATR value indicates a series of sessions with limited ranges of quiet days. Less volatility was induced by the lengthy lateral swing in pricing that resulted in these elevated ATR readings. Decreased ATR readings over a lengthy period of time may indicate that a person is focused, and the potential for an uptrend or reversal to continue. 
  • ATR is very beneficial in identifying volatility swings and can be used as entry or exit signals. Contrary to fixed dollar-point or percentage stops, which provide little space for variation, the ATR stoppage will adapt to rapid price shifts or instability zones, which may produce an abnormal price shift in any direction. The ATR should be multiplied by 1.5 to identify these erratic price changes. 

Frequently Asked Questions

An average true reading level measurement is used in a number of situations. The average price range of a stock over a given time period is known as an ATR valuation. Therefore, if a stock’s ATR is $1.18, its selling price will typically fluctuate by $1.18 each business day. 

As a general rule, multiplying the ATR times two will yield a suitable loss limit level. As a result, if one were to invest in a stock, they might set a stop-loss around a price that is double the ATR under the price at which it was purchased. The stop-loss threshold for a stock long would be double the ATR beyond the starting price. 

The ATR is an average of the real lengths all through the period of time in question. ATR determines volatility by taking into consideration any gaps in the price shift. The ATR measurement normally uses 14 intervals of time that can change during a single day, month, or week. 

The most common value to utilise the ATR indication is 14 which represents a period of 14 days, although there are other effective trading methods as well. One uses a smaller number, which usually denotes a briefer amount of duration if one wished to focus more on current volatility rates. 

The ATR’s default value of 14 indicates that the algorithm will calculate a price’s variability using 14 of the newest time periods. As was already explained, this usually takes 14 days. The value of the indicator becomes more reactive and creates a choppy average motion line when the ATR level falls lower than 14. 

    Read the Latest Market Journal

    Weekly Updates 4/3/24 – 8/3/24

    Published on Mar 4, 2024 17 

    This weekly update is designed to help you stay informed and relate economic and company...

    Weekly Updates 26/2/24 – 1/3/24

    Published on Feb 28, 2024 61 

    This weekly update is designed to help you stay informed and relate economic and company...

    All-in-One Guide to Investing in China via ETFs

    Published on Feb 27, 2024 401 

    Start trading on POEMS! Open a free account here! Why China? In the vast landscape...

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 421 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 62 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 70 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 89 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 200 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com