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.
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.