Catch The Exact Top And Bottom Of The Market With ATR Indicator

Average True Range

Can you catch the exact top or bottom of the market? Do you know there can be a strategy which can tell you on intraday basis that the market has reached an extreme? Suppose you are seeing that Nifty has suddenly fallen for 60 odd points OR say, Crude Oil has risen by 40 points. Do you think that the scrips will go more extreme? If your answer is YES, then you are wrong. Maximum times the market will reverse back from an extreme instead of moving further into the extreme. But how to identify that the market has reached an extreme? There comes the use of a technical indicator called ATR indicator.

ATR = Average True Range. It has been introduced by J. Welles Wilder. I will not go into the calculation of ATR. In simple terms the ATR indicator measures the volatility. A rising ATR denotes that the volatility is increasing and a falling ATR denotes that the volatility is dying down. Generally ATR is calculated on a 14-period basis. Watch the image below. There I have shown Nifty index chart with 14-day ATR indicator. Check the 14-day ATR of Nifty index is 78.541.
ATR Indicator
This means that the average true range of Nifty index is 78.541. Now say next day Nifty starts falling since the open and is almost 70-80 points down. Shall you open new short OR hold any existing short in Nifty? NO. As Nifty has almost fallen its average true range there is high chance that Nifty will bounce back as its already completed its range. So, we will open up a BUY order with a suitable stop value.

Similarly, the ATR indicator can suggest you a SHORT SELL level in times of rallies. We will not get sure shot trades every day as per this strategy, but whenever we will get a trade that can be very accurate. Your comments in this regard will be highly appreciated.

Indrajit Mukherjee

Indrajit is a professional blogger and Trading System developer, Amibroker expert, WordPress expert, SEO expert and Stock market analyst. He is studying the stock market since 1995 and is an active trader since 2000. He started the journey of StockManiacs.net on 2008. He follows Indian and world markets as well as the forex market closely.

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2 Responses to Catch The Exact Top And Bottom Of The Market With ATR Indicator

  1. raovr2001@yahoo.com' R V RAO says:

    desr sri indrajit ji.am an avid fan of yours of your webinars and trading articles written by you for traders. it is your sincerity to present things in lucid stles and keeping things simple which attracted me so much so i got regd as zerodha customer through your stock maniacs.com(user id ZR1983).

    1.)SIR NOW on your above article atr,is it same 78.54 for all days for nifty.if not pl. reply with asource where i can look for same daily.
    2.sir, i look forward to a hands on and live (in trading hours) training of nfty/bnk nfty intraday trade and commodities intraday trade on zerodha trade plotforms under your able guidance.pl. make it happen for small traders like me .
    rgrds and thanks,
    r.v.rao

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