Average true range, popularly known as ATR, gives the historical price range of a stock or the volatility of a stock plotted in a time frame (14 by default but can be changed) to get the average range of the price of the stock. But ATR does not show the price trend. To overcome this shortcoming Average True Range (ATR) Bands were developed. ATR Bands are truly an extension of ATR. An envelope is plotted around ATR to understand whether the price is in an uptrend, downtrend or moving in a sideways pattern.
ATR – Before moving further let us know about the concept of ATR. ATR was developed by J. Welles Wilder as an indicator to measure volatility. ATR does not give price direction but shows volatility. ATR gives volatility range that includes price gaps and limited moves, making it more efficient than the simple price difference between high-low of the day. A band is formed around ATR to predict price movement.
How to select ATR Bands in Zerodha Kite Chart?
- Open Zerodha Kite Marketwatch.
- Select the stock from Marketwatch.
- Right click on the stock.
- Select Chart.
- Go to studies.
- Select ATR bands.
- Default setting is Period – 5, Shift – 3, Field – Close, Channel – Fill.
- These fields can be tweaked to suit personal requirements.
Salient features of ATR Bands –
- The bands calculate the upper price range and lower price range.
- It begins by calculating the moving average of a stock price for a specific period of time.
- To form the upper envelope, ATR value is added to the moving average value.
- Similarly, ATR value is subtracted from moving average value to get the lower range of the channel.
- The average true range bands give us unique signal. If the price of the stock touches or penetrates the upper band, the trader assumes that the stock will continue to move upwards. On the other hand, if the stock’s price touches or penetrates the lower band, it is expected that the price will follow the direction of the lower band and move downwards. And if the price moves around the middle zone of the band, we can assume that the stock is in a sideways trend and stop taking a positional view on the stock.
- The band can also be used as a substitute for the Bollinger band trading system.
For more information on other technical indicators, visit our technical indicators section.