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The Average True Range (ATR) indicator quantifies price volatility for financial instruments. Created by J. Welles Wilder Jr., it was first presented in his 1978 book, New Concepts in Technical Trading Systems. The ATR computes the average range of price movements by evaluating high, low, and closing prices over a specific period, usually 14 days.

Traders employ ATR to assess the risk involved in a particular transaction. A high ATR value signifies increased price fluctuations, implying greater volatility and potential risk. In contrast, a low ATR value suggests limited price movement and reduced potential risk.

Utilizing ATR for defining trailing stops enables traders to automate their trading decisions based on volatility shifts. To determine upper and lower bounds using ATR, apply the adjustable ATRX multiplier. These resulting values are termed as ATR short and ATR long, respectively. Traders can then rely on these boundaries to decide when to enter or exit a trade depending on volatility changes. Since ATR does not offer insights on price direction, it is advised to use an additional momentum indicator like RSI.

Trailing Stops

With the adjustable ATRX multiplier for ATR, upper and lower trailing stops are computed.

  • ATR short, the lower boundary, is calculated by subtracting the ATRX result from the next round's bid.
  • ATR long, the upper boundary, is calculated by adding the ATRX result to the next round's ask.

Utilizing the Indicator

Purchase Criteria

A buy order is permitted when the ask price surpasses ATR long.

Sale Criteria

A sell order is permitted when the bid price falls below ATR short and the price is beyond the break-even point.

Trading Illustration

An example depicting the performance of trading using this strategy. Trading Example