Average True Range

[Duckman#72]

Evening All

After reading Tech's comments on another thread I am trying to come to terms with Average True Range and how to use it as an indicator.

Can someone please explain what it represents and how to read it.

For example I have just looked up BMX with Market Analyst and have applied the ATR graph. It comes up with "10 Period Average True Range". The ATR falls from 0.025 in Feb 2006 to 0.009 recently. What is that telling me? What does the figure 0.009 represent? What is the 10 period?

If I don't understand how things work I find it very difficult to use them with any confidence!!

Thanks for any assistance

Duckman

 

[Kauri]

Average True Range - ATR
A measure of volatility introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems.

The True Range indicator is the greatest of the following:
-current high less the current low.
-the absolute value of the current high less the previous close.
-the absolute value of the current low less the previous close.

The Average True Range is a moving average (generally 14-days) of the True Ranges. Wilder originally developed the ATR for commodities but the indicator can also be used for stocks and indexes. Simply put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR.

Try this online Investopedia ...
http://www.investopedia.com

 

[GreatPig]

It's basically a measure of stock volatility over the specified period.

Often used as part of a trailing stop-loss since it automatically provides a wider stop for more volatile stocks. Much the same as Guppy's countback line.

Here's recent ZFX showing raw ATR plotted as Close - 2 x ATR(14):

And here the same thing but as a trailing stop with the shown start date:

And here another trailing stop but from an earlier start date, showing the trade being stopped out on the gap down:

How tight you make the stop (ie. the ATR multiplier - 2 above) would depend on your time frame. For longer-term holds you'd need to make it wider or you'd be constantly stopped out. Personally I don't manage longer-term stocks like this.

GP

 

[Duckman#72]

Thanks for your help guys.

Duckman

 

[tech/a]

Interesting article on True range from a different veiw.

http://www.insidefutures.com/articles/article.php?id=2257

 

[stevo]

I use ATR based stops on weekly charts - similar to the approach outlined by GP. See the chart below;

http://photos1.blogger.com/blogger/4684/1180/1600/QGC indicators.png

I have other examples on the blog below.

As a longer term trader I find that I am better off giving the trades a bit of room using the ATR stop. I like the way they will go sideways when the stock does and follow it up when it moves up. By using a multiple of the average true range I can keep the exit point far enough away that I will usually only get stopped out if there is a substantial correction, not just a minor dip. But then I am trying for longer term trades.

Stevo
http://drawdown.blogspot.com/

 

[Prime]

Interesting article on True range from a different veiw.

http://www.insidefutures.com/articles/article.php?id=2257

Hi tech/a,

I read the article ... made good sense, but I couldn't see how charting a band that tracked the stock more closely was of any major use, nor how you'd use it as an indicator.

Are you able to give us a bit of a description of how it could be used?

Thanks ...

 

[tech/a]

Prime.

I dont use ocsillators in my short term trading.

The only way I would use it would be as a longer term exit (Possibly).
I would expand the ATR to around 4-6 as 2 is too narrow for longer term use.
I would then have to test it to see if it improved results.

I'm just about to go out the door to get away for the weekend so hope this is enough for now.

 

[bingk6]

It's basically a measure of stock volatility over the specified period.

Often used as part of a trailing stop-loss since it automatically provides a wider stop for more volatile stocks. Much the same as Guppy's countback line.

Here's recent ZFX showing raw ATR plotted as Close - 2 x ATR(14):

Hi GP,

I noticed that the atr stops in the second and third diagrams only ever move upwards or sideways, whereas the raw atr plot (first diagram) moves up and down (in sync with the SP). As the raw atr plot is calculated as as C-2xatr(14), it will never cross the SP or vice versa, and therefore can never generate the stop signal. Can you please elaborate the difference between the raw atr plot and theatr plots for the second and third diagrams.

TIA

 

[GreatPig]

I noticed that the atr stops in the second and third diagrams only ever move upwards or sideways

That's exactly the difference.

The trailing stop is just the raw plot except that it can never go down. When the raw plot starts to fall, the trailing stop goes sideways until the raw plot crosses above it again.

This lets the close fall by the 2xATR(14) limit from its post-purchase high before a sell is signalled.

The attached chart shows both the raw and trailing stop ATR plots overlaid (using 2.5xATR(14) in this case). Wherever the raw one (orange) drops, the trailing stop (blue) just goes sideways.

Cheers,
GP

 

[GreatPig]

As another possibility, a trailing stop plot for a short position could potentially be used as an entry signal for a long position, effectively giving an SAR technique. Guppy does this with his countback line, although his method of doing a countback entry is slightly different from his countback stop (IMO though, a short stop method could be better than his method - certainly much easier to calculate in software - although I've never backtested it).

Here's an example using ALL. The buy signal here fails sadly over the next couple of days, but then recovers to soon be in profit. Note that a short trailing stop only ever goes down and sideways, never up.

And here would be the resulting long trailing stop plot using that purchase date (buying on the day after signal). Despite the two day drop on purchase, it doesn't get stopped out using the 2.5xATR(14) trailing stop.

Note that I'm not recommending this as a trading technique though, and have never tried backtesting it. The ALL example here just happens to work very nicely with this particular trailing stop, but many others wouldn't.

Cheers,
GP