Average true range
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Average True Range - ATR
A measure of volatility introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems.
The True Range indicator is the greatest of the following:
-current high less the current low.
-the absolute value of the current high less the previous close.
-the absolute value of the current low less the previous close.
The Average True Range is a moving average (generally 14-days) of the True Ranges.
Investopedia Says:
Wilder originally developed the ATR for commodities but the indicator can also be used for stocks and indexes. Simply put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR.
Related Links:
Find more profitable entry and exit locations with this standard indicator. Measure Volatility With Average True Range
Find entry or exit signals or develop a complete system based on this versatile tool. Enter Profitable Territory With Average True Range
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With an appropriate filter, you can ride the waters to rising profits. Surf's Up With Filtered Waves
While range bars are not a type of technical indicator, traders can employ this useful tool to identify trends and interpret volatility. Range Bar Charts: A Different View Of The Markets
Wikipedia on Answers.com:
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Average true range
Average true range (ATR) is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities.[1] The indicator does not provide an indication of price trend, simply the degree of price volatility.[2][3] The average true range is an N-day exponential moving average of the true range values. Wilder recommended a 14-period smoothing.[4]
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Contents
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Calculation
The range of a day's trading is simply 
. The true range extends it to yesterday's closing price if it was outside of today's range.
![\mbox{true range} = {\max[(\mbox{high} - \mbox{low}), \mbox{abs}(\mbox{high} - \mbox{close}_\mbox{prev}), \mbox{abs}(\mbox{low}-\mbox{close}_\mbox{prev})]}\,](http://wpcontent.answcdn.com/wikipedia/en/math/6/8/0/6805b6a83349aec4bcfde8c80ac756d5.png)
The true range is the largest of the:
- Most recent period's high minus the most recent period's low
- Absolute value of the most recent period's high minus the previous close
- Absolute value of the most recent period's low minus the previous close
The idea of ranges is that they show the commitment or enthusiasm of traders. Large or increasing ranges suggest traders prepared to continue to bid up or sell down a stock through the course of the day. Decreasing range suggests waning interest.
Applicability to futures contracts vs. stocks
Since true range and ATR are calculated by subtracting prices, the volatility they compute does not change when historical prices are backadjusted by adding or subtracting a constant to every price. Backadjustments are often employed when splicing together individual monthly futures contracts to form a continuous futures contract spanning a long period of time. However the standard procedures used to compute volatility of stock prices, such as the standard deviation of logarithmic price ratios, are not invariant to (addition of a constant). Thus futures traders and analysts typically use one method (ATR) to calculate volatility, while stock traders and analysts typically use another (SD of log price ratios).
References
- ^ J. Welles Wilder, Jr. (June 1978). New Concepts in Technical Trading Systems. Greensboro, NC: Trend Research. ISBN 978-0-89459-027-6.
- ^ ATR Definition - investopedia.com
- ^ Joel G. Siegel (2000). International encyclopedia of technical analysis. Global Professional Publishing. p. 341. ISBN 978-1-888998-88-7. http://books.google.com/books?id=IjuoD5yJs8YC&pg=PA341.
- ^ This is by his reckoning of EMA periods, meaning an α=2/(1+14)=0.1333.
External links
- Measure Volatility With Average True Range at investopedia.com
- Enter Profitable Territory With Average True Range at investopedia.com
- Average True Range (ATR) at stockcharts.com
- Average True Range (ATR) at surefiretradingchallenge.com
- ATR-Filtered SMA System at surefiretradingchallenge.com
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