MetaStock Average True Range Function

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Average True Range is a popular method of determining a security's volatility. That is, the tendency of a security to move, in either direction. Its uses range from that of system entry (i.e. market searches) to money management (i.e. determining trade size and exits).


The True Range for a particular day is the greatest of the following:

§ The distance from today's high to today's low.

§ The distance from yesterday's close to today's high.

§ The distance from yesterday's close to today's low.

The Average True Range is then calculated by taking an average of the true ranges over a set number of previous periods. Care should be taken to use sufficient periods in the averaging process in order to obtain a suitable sample size, i.e. an ATR using only 3 periods would not provide a large enough sample to give you an accurate indication of the true range of the security's price movement. Note: MetaStock uses a period of 14 as its default value.


Periods _ This specifies how many periods are used to calculate the average of the true ranges.


The following formula obtains the value of the 15 period Average True Range:


In the above example:

Periods = 15


A more useful application of this example could be:


This formula categorises different securities in the market by considering their volatility percentage. A volatility percentage represents the ATR of a security as a percentage of the present price. As such, speculative securities would generally have higher volatility percentages than blue chip securities. The formula above stipulates that the volatility percentage (denoted by `ATR(15)/C*100') is less than 3.5% (denoted by `<3.5'). 

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