Financial markets are huge places where traders can invest their money to have high returns on the same. There is stock, forex, cryptocurrency, indices, metals, and many other instruments that could be traded for desired profits. Traders can select the instruments that they find feasible and be successful traders.

But, the process is not that simple traders have to go through a lot of aspects for a profitable trade. The research, analysis, study and read the market trading to have detailed knowledge of the trade and market conditions. In all these, there are other small factors that traders need to be aware of, ratio, calculations, average true range, and other fundamental analysis indicators along with the technical tools.

The article focuses on one such trading indicator, average true range (ATR), and its aspects. Readers, by the end of this article, will be able to know what ATR is and how they can use it for fruitful trading. Let’s quickly explore the ATR trading indicator and have desired market results.

## What is ATR?

ATR stands for an average true range that is a technical indicator. Traders can use it for a market analysis of the price of the assets, indicating a considerable price move of an asset in a period of time. In simple terms, it provides traders with an idea of how volatile the asset is for trading.

While trading in the financial markets, traders can employ ATR to predict how the price of the asset will move in the future. In addition, traders can even place the stop-loss order based on the ATR analysis. Thus, achieving the profits from the trade and minimizing the loss.

It is said that ATR is similar to the moving average method as it also indicates the price movements over a specific period. The period is generally 14 days but could be changed as per the requirement of the trader.

If we go into the history of the technical indicator, the average true range was developed by J. Welles Wilder. ATR gives the degree of price volatility of the instruments traded and not the price trend of the instrument. Traders can use it easily for a favorable trade and earn profits.

## How does Average True Range Operates?

The average true range is based on a formula that we’ll be discussing in the article. The calculation helps the technical analysis tool to suggest or notify the change in assets and helps traders make informed decisions. In the trade with ATR, traders have a 14 days period as default, and it could be customized as per need. As a result, traders can have shorter or longer periods.

In shorter periods, the trading signals generated are more in comparison to the long periods that have a high probability of fewer trading signals.

For example, a trader wants to invest in the forex market for a period of 6 days and thus analyze the market volatility using the 6-day ATR. The short-term trader uses historical data of the price of the currency pair in reverse chronological order. After that, the trader finds the maximum value of the currency high, subtracting the current low.

The value of the recent high minus the previous close and the absolute value of the currency low minus the previous close of the currency. This gives the true range of the currency in the market for six trading days. Further, these are averaged to calculate the value of six-day ATR.

## Calculation of ATR

The average true range has the formula to calculate the value of the asset traded in the market. Although, they can change the time period according to their requirements. To understand this properly, we have given the process of calculating ATR along with the formula.

The initial step of ATR calculation is to identify the series of true range values for the asset. The price range for the asset could be found for the trading day by subtracting the high of the day from the low value. Traders can use the given formula for calculating the required details:

True Range = Maximum {( High – Low), Abs(H-Cp), Abs(L-Cp)}

Average True Range (ATR) = (1/n) Σ(n) (i=1) TRi

Here, in the formula

- Abs = Absolute
- H = Higher
- C = Close previous
- L = Low
- TRi = a particular true range
- n = Time period

## What Average True Range Tells?

ATR was initially developed by Wilder for commodity trading, but with time it became useful for other markets as well and is now used for identifying the range for stock, indices, etc. When a stock market has high volatility, it has high ATR, and low volatility has low ATR.

Market traders can use it to decide on the entry and exit of the trade and have an accurate trading system. With the technical analysis tool, traders can measure the daily market volatility of the instruments using the given formula. Traders having ATR can know the volatility that is created by gaps and limits of the up and down movement of instruments.

It does not tell or measure the price direction or trend of the market. It is a simple tool that uses the historical data of price to provide ATR.

Traders use it to decide their exit no matter how the entry was made. Even other trading styles could be incorporated with ATR to have confident trades and make appropriate decisions.

Let’s take an instance to understand the use of ATR:

The value of ATR for six days is calculated as 2.19, and on the seventh day, the true range is 2. Consequently, using this, traders can calculate the range of the asset by multiplying the past value of ATR by the number of days minus one. Next, they add the true range for the current period of the asset.

Then the sum is divided by the time frame; here, if we take the second value of ATR as 2.55. Then traders can repeat the formula and get the range.

**(2.19* (6-1) + (2))) / 6**

This gives the value of 2.55.

Using the formula and ATR, traders can find out the next close and not the direction of the breakout of the asset. When ATR is added to the closing price, traders can buy when they see the day’s price trade above the value.

## Limitations of Average True Range (ATR)

ATR is a technical analysis indicator that has been introduced in the market by a market expert. Hence, a man-made thing that could have its limitations, if we talk of ATR in this respect that it broadly has two significant limits.

To begin with, the first ATR limitation is a subjective measure; this means that the trading analysis tool is open to interpretations and does not offer intact results. ATR values do not have certainty that the market trend will reverse or will remain the same.

The readings of ATR are compared with previous market readings giving the market trend’s strengths and weaknesses.

The second limitation of ATR is it only measures the market volatility and does not give the direction of the assets price. This results in mixed market results having mixed signals when the markets have trends with turning points.

## Average True Range vs Standard Deviation

Average true range and standard deviation both are technical analysis tools/ indicators that could be used to analyze the price of assets also traded in the market volatility. Thus, traders can manage the market risks using such analysis tools. But, the two are different in their work and formulas.

The standard deviation gives the dispersion of the data using the moving average which is usually 20 days and not a 14-day period. In a similar manner to the average true range, it has a higher standard deviation that indicates higher volatility. However, these two are different, with several factors making them apart.

The standard deviation has a different formula and process of calculating the price movements of the assets and market volatility. This is the major difference between the two citing them apart.

## Average True Range Trading Strategy

The average true range was used for commodities markets with time expanded and now is used for other financial markets. It could be used for short-term and long-term trading strategies for desired results. Some of the strategies that traders can incorporate with ATR are scalping, day trading, position trading, short selling, etc.

We’ll be seeing how these could be used for various markets:

**ATR in Forex Market**

Forex market trading is full of volatility and liquidity along with a huge market to trade. It is one of the largest financial markets globally; thus, traders have huge profits and losses when they enter or exit the trades at inappropriate times. To reduce this tension, traders can employ ATR with their forex trading strategies for profitable trades.

It will assist them in analyzing the current market volatility and where they should place the stop-loss orders to limit their risks. With the currencies, the ATR reading when high, the stop-loss is wider, and when ATR is low, the stop-loss is narrow.

**ATR in Day Trading**

Day trading is a short-term trading strategy that has an investment in a day. These could be for a minute, an hour, or for a whole day. Moreover, traders can hold single as well as multiple market positions to trade in day trading. The profits made in such a strategy are small but frequent, with the closure of all the market positions by the end of the day.

With ATR in day trading, traders can measure the price action daily for short and long terms.

**ATR in Futures**

Futures and forward contracts are derivative trading products that could be used for forex, stock, commodities, and other markets. Traders can use ATR with these to know the size of the trade where traders could place the instruments. They can understand the market volatility and minimize their trading risks.

## Accessibility of Average True Range

The average true range is the technical analysis indicator that is available with online brokers. Traders can select their brokers and invest in the market by downloading the trading platforms offered by brokers, installing them, and simply using them. However, traders need to choose a broker with good market research and understanding.

The broker should have the ability to support the trader, should be regulated and authorized, has advanced features, best trading services, 24-hour customer support, low trading commission, fixed and feasible spreads, various trading accounts, several trading instruments, and many other functions.

As these are the ways traders use to invest and have the services, they should be trustworthy and not scams. One such regulated and reliable broker is **Investby**; it is duly registered and licensed and has all the necessary services and tools that are listed above.

Traders can simply open their trading account with a broker by registering and having the ATR and other technical and fundamental analysis tools/ indicators for favorable trades.

## Conclusion

ATR is an excellent technical tool that traders can use for profitable trading and investing in the financial markets. The technical analysis indicator has a simple calculation process and is used in trading. Traders can make the best trading decisions that generate profits by applying the trading tool through platforms offered by brokers.

However, traders should not rely on it completely and use other trading tools along for confident trading decisions. The broker should also be selected wisely as they support the traders in trading.