Understanding the ATR Indicator for Trading

Imagine you're holding a stock, and it’s been swinging wildly lately. 📈📉

Would you:

• A. Set a tight stop-loss to avoid bigger losses?
• B. Give it more room to breathe because of the volatility?

If you're unsure of what action to take, the ATR (Average True Range) indicator can come in handy.

What is ATR?

The ATR helps traders measure market volatility and adjust strategies accordingly.

• Higher ATR: Indicates higher volatility.
• Lower ATR: Indicates a stable price.

Market Volatility: Refers to how fast the price of a stock goes up or down.

• If the price changes a lot in a short time, the market is highly volatile.
• If the price moves slowly, the market has low volatility.

How is ATR Calculated?

Step 1: Calculate the True Range (TR)

Find the highest of any of the following 3 numbers:

1. Difference between the current high and current low.
2. Difference between the current high and previous close.
3. Difference between the current low and previous close.

Step 2: Calculate the ATR

ATR is the 14-day moving average of the True Range.

• You can also use a shorter or longer period depending on your trade requirements.

How to Use ATR in Trading?

• If a stock has an ATR of ₹100 per day, it means that the stock has an average range of movement of ₹100 per day.
• If the ATR increases to ₹120, it indicates higher volatility.
• If the ATR falls below ₹100, it indicates lower volatility.

Important Note:

ATR only measures volatility. It doesn’t tell you if the stock will go up or down.

Combine ATR with Other Indicators

To make an informed decision, always combine ATR with other indicators like:

• RSI (Relative Strength Index)
• Moving Averages

This helps you get a clearer picture of market trends and improves your trading strategies.