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Average True Range (ATR) – A Magical Tool

Average True Range is an indispensable tool for designers of good trading systems. It is truly a workhorse among technical indicators. Every systems trader should be familiar with ATR and its many useful functions. It has numerous applications including use in setups, entries, stops and profit taking. It is even a valuable aid in money management. The following is a brief explanation of how ATR is calculated and a few simple examples of the many ways that ATR can be used to design profitable trading systems.How to calculate Average True Range (ATR):

  • Range: This is simply the difference between the high point and the low point of any bar.
  • True Range: This is the GREATEST of the following:
    1. The distance from today’s high to today’s low
    2. The distance from yesterday’s close to today’s high, or
    3. The distance from yesterday’s close to today’s low

True range is different from range whenever there is a gap in prices from one bar to the next. Average True Range is simply the true range averaged over a number of bars of data. To make ATR adaptive to recent changes in volatility, use a short average (2 to 10 bars). To make the ATR reflective of “normal” volatility use 20 to 50 bars or more.

Will write more with Examples …Next week !!

Technically Yours