What is an Average True Range?
Average true range (ATR) is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities, but has been used in all types of securities.
In the Average True Range Trading Strategy, the indicator does not provide an indication of the price trend, only the degree of price volatility. The average true range is an N-day smoothed moving average (SMMA) of the true range values. Wilder recommended a 14-period smoothing.
The indicator moves up and down in relation to the price changes in an asset. A new ATR will be calculated with each new time period.
The idea is to take the close into account to calculate the range if it yields a larger range than the daily range (High – Low)
Average True Range Indicator
The ATR indicator is a volatility indicator and reveals information that can be used to deduce how volatile the stock is.
If the indicator showcases a large range, it means high volatility. Similarly, a small range indicates low volatility. Instead of providing a price trend, the ATR indicator strategy helps traders deduce entry and exit locations, and has been proven extremely useful over the years.
How To Calculate The Average True Range?
Before we can move forward with ATR calculation, we need to calculate a series of true range values for security. The true range formula is:
TR = Max[(H − L),Abs(H − CP),Abs(L − CP)]
The Average True Range formula is:
ATR = (1/n)*i=1nTRi
TRi = A particular true range
n = The time period employed
Why Use The Average True Range Strategy?
The Average True Range trading strategy was originally developed for commodities, but the ATR indicator has since then been used for stocks and indices as well.
Since the ATR is easy to calculate and only needs historical price data, it helps traders to measure the daily volatility of an asset.
ATR trading strategy is commonly used by traders to foresee an exit method, which can be applied no matter the entry point in the stock or the commodity.
How to use The Average True Range Trading Strategy?
Since ATR measures volatility, it is difficult to define a proper bearish or bullish scenario. To simply put in words, a stock having high volatility will have a high ATR value and low volatility will have a low ATR value. Since it does not indicate the price direction, rather it is used primarily to measure volatility caused by gaps and limit up or down moves.
Building Average True Range on Mudrex
Since it only tells volatility we can compare two different ATR values to generate Buy/Sell signals. If the shorter time period ATR value crosses up the longer time period means that recently the price is more volatile and vice-versa.
- Buy:- ATR crosses down ATR
- Sell:- ATR crosses up ATR
- Time Frame:- 6H
- Stop Loss:- 10% (Trailing)
Creating on Mudrex
Components:- We will need 2 compare blocks, one to generate buy signal the other to sell.
For Buying, we will use the following setting:-
For Selling, we will use the following setting:-
Running on Binance Futures: BTC/USDT with tick interval of 6H yielded an overall profit of 12.96%
Since ATR is a volatility indicator pairing with a momentum or oscillator trend indicator could generate better signals. Find out more such trading strategies in our blog.