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
§ 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
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').
article is a snippet from the
MetaStock Programming Study Guide...
The Simple Secret to Make Metastock Easy & Identify Profitable
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