Average (mean, average) is a statistical concept that is widely used in the world of trading. In addition to moving averages Another technical indicator that uses averages as its main component is average actual distance (ATR). Know what it is. average actual distance (ATR) and how to use it in trading by reading the following articles:
Understanding Average True True Range (ATR)
average real range It is a technical indicator that is calculated using the average of the difference between the highest and lowest price of an asset over a period of time. This indicator was first developed by Welles Wilder in his book New Concepts in Trading Systems in 1978.
This indicator is an indicator that is used to assess the volatility of market prices. The higher the ATR, the more volatile the market movement of an asset is. From this volatility data Traders will be able to determine whether the market for the asset is traded or not. The asset market is more active. More traders are more interested in buying or selling.
Also, ATR is a lag indicator. Also known to appear only when the price of the asset being analyzed occurs. It also means that the ATR indicator will not give sell or buy signals. Therefore, traders need to set entry and exit points independently.
Average True Range Rumus
as the name implies which is the average true range You must first know how to calculate the true range. The mean is then calculated for the 14 periods. In this case, the true interval is calculated by selecting the maximum value from the following three equations.
1. TR = Highest Price – Lowest Price
2. TR = Highest Price – Closing Price of the previous period
3. TR = Previous Close Price – Lowest Price
The resulting values of the second and third equations are absolute (no negative values), so if today’s low is greater than the previous close, Such values will still be considered positive.
After finding the maximum value from the above three equations Now it’s time to enter the result into the following formula.
ATR = (ATR of the previous period * (n – 1) + TR) / n
ATR = Average True Range
n = number of periods. The number of periods used is typically 14, but traders can switch to 10 for short-term price fluctuations, or 20 and 50 for long-term price fluctuations.
TR = True Range
How to Use Average True True Range
- A high ATR indicates a high volatility. On the chart, a high ATR is usually accompanied by the distance between the further bands. A high ATR is when the asset’s price is about to reverse. Indicates that the asset reversal is supported by market forces. Whether it’s market forces from sellers (downs) or from buyers (bulls), high ATRs are often caused by rapid changes in the price of an asset, either up or down. not long
- A low ATR indicates that the asset’s price volatility is low. Therefore, it can be said that the asset market is silent. Usually, this low ATR appears when the market is experiencing sideways. Indicates that the lateral condition may continue (continuous) or reverse (reverse).
- While not an indicator that can signal buy or sell, ATR can be a benchmark when you should buy and sell. This is especially true if you use the volatility of price action as the primary variable. For example, use 1.5 x ATR to quickly identify price changes.
- You can also consider the price volatility in this area to determine stop-loss points and levels. When the price volatility is high, you should place a tight Stop Loss considering that the price can go up and down at any time. Stop Loss can be set more loosely.
Example Average True Range (ATR)
From the picture above it can be seen that:
- The ATR value will increase if the price volatility increases. The stronger the change in volatility, the higher the ATR.
- A reversal signal along with a high ATR indicates a strong change in the price trend. However, the ATR indicator cannot determine whether this change in volatility is due to. sell or buy pressure.
Disadvantages of Average True Range
The ATR is a useful indicator to determine the level of volatility in the market. However, this indicator cannot show which side is causing the volatility. in fact It is important for traders to know whether the Bears or the Bulls are dominating the market.
Due to this shortcoming, the ATR indicator should not stand alone. but should be helped by other technical indicators such as oscillator indicator or moving average convergenceThis allows traders to open positions based on the parties that dominate the market and allow volatility to occur.
Another disadvantage of the ATR indicator is its shape as a lagging indicator. as described above An lagging indicator is an indicator whose value appears only after the price action has occurred. As a result, traders cannot predict how high the level of price volatility will be. and be prepared for these volatility
Like the previous disadvantage This makes the ATR indicator better combined with other technical indicators. Leading indicators or price movement Therefore, traders will not be surprised if there are high changes and high reversals.
The average true range or ATR indicator is an indicator that is the result of the change in the average price, both the highest and the lowest price, or the difference between the price and the closing price in the previous period. This indicator is useful for Determine the level of price volatility But it cannot help traders identify who is the main market participant. Therefore, other technical indicators must be included.
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