Average True Range Indicator (ATR) Strategy, Formula

average true range

Average True Range indicator, popularly known as ATR shows the historical price movement of a stock over a specific period of time. Though it is similar to historical volatility, ATR shows the average range of price movement of a stock over a specific period of time where as the historical volatility of a stock is always calculated annually. With the ATR known for a particular period of time, we can presume whether the stock is topping or bottoming out. The ATR line slope also indicates whether the stock is more volatile or not. Zerodha Kite charts plot this indicator for traders.

How to set up Average True Range indicator in Zerodha Kite?

ATR Indicator
  • Go to MarketWatch.
  • Choose the stock you are going to trade.
  • Right click on the stock and select chart from graphic icons.
  • Chart window of the stock opens.
  • Go to studies. Select studies.
  • Go to Average True Range and click on it.
  • A small window opens with default parameters of the indicator.
  • Once the parameters are selected, the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
  • The default values can be changed as per own requirement. By default, the indicator considers a 14-period candle for plotting the chart.

ATR in intraday –

Average True Range Indicator
  • The indicator works well in all time frames.
  • The picture above shows State Bank of India (SBIN) stock price movement with respect to ATR.
  • The chart shows 1 min. timeframe.
  • The strategy shows the price trend. Understanding price trend from this indicator is important before creating a position.
  • Low ATR value indicates a sideways trend.
  • High ATR value indicates the price is a definitely trending.
  • When ATR bottoms out and starts going up sharply, it shows price is going to break out from the existing range with a definite trend.
  • ATR works well when combined with other indicators.

The Average True Range indicator works well in judging the volatility of the markets. Traders can use this technical indicator to understand the market trend strength. The common way of understanding whether the volatility is rising or dying down is to use the ATR with one of its moving average (MA). Another common usage of ATR can be in predicting the exact top or bottom in intraday. This post on ATR bounce trading system can elaborate more about the usage of this indicator.

Average True Range Indicator (ATR) Strategy, Formula

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