MetaStock Average True Range Function

Provided By www.meta-formula.com

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).

CALCULATION

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.

SYNTAX ATR(Periods)

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

EXAMPLE

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

ATR(15)

In the above example:

Periods = 15

APPLICATION

A more useful application of this example could be:

ATR(15)/C*100<3.5

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').