Volatility - average true range

The average true range (ATR) is another indicator developed by J. Welles Wilder Jr. in New Concepts in Technical Trading Systems.

The indicator is useful in estimating how volatile the market is. I mainly use it to set proper stop losses so that the volatility doesn’t take my stop loss before my trade gains traction.

Now, how about that formula?

ATR formula

ATR = (PrevATR * (n – 1) + TR) / n

Here’s what it means:

• PrevATR: The ATR of the previous period.
• n: The period of time over which the ATR is calculated. Typically, this is set to 14 periods.
• TR: The true range for the current period. It’s the greatest of the following values:
  • The current high (H) minus the current low (L)
  • The absolute value of the current H minus the previous close (C)
  • The absolute value of the current L minus the previous C

Here are the three methods for calculating TR:

Figure 4.6 –...