Crypto Trading With Average True Range (ATR) Indicator - Crypto Academy - S5W1 - Homework Post for @kouba01

Explained: Average True Range Indicator (ATR)

In J. Welles Wilder's book New Concepts in Technical Trading System, the ATR (Average True Range) was one of the technical analysis indicators discussed (Trend Research, 1978).

Average true range technical analysis was developed by Wilder to quantify the volatility of commodities, but it can also be applied to other assets. The price direction is ignored by the ATR as a volatility indicator. Instead, it looks at how much an underlying asset's price changes over time and whether there are any price discrepancies. The ATR indicator value is calculated for each hour in an hourly time period. The calculation is done for each day in a daily time frame, and so on...

What is ATR (average true range)?

According to Wilder, the average true range indicator formula is centred on the calculation of true ranges for the given period. It is based on three strategies that are quite easy to implement:

The difference between yesterday's close and today's high;
The difference between today's low and yesterday's close; today's high and today's low.

The highest number from the above three approaches is used to calculate the true range for the given period. It makes no difference whether the absolute value is positive or negative because it is taken into account. The average value is calculated using the values for each period, which by default is 14 periods. Wilder smoothed out the rough edges.

generated the following value for a 14-period ATR using the preceding ATR value:

[(Previous ATR x 13) + Current TR] / 14 ATR = [(Previous ATR x 13) + Current TR]

The generic average true range indicator formula for times other than the indicated 14 periods is:

ATR = (Previous ATR * (n - 1) + TR)

Where:

• ATR = Average True Range
• n = number of periods or bars
• TR = True Range

You can modify the amount of periods used in the ATR calculation depending on your trading strategy. Shorter time frames generate more signals, but longer time frames generate fewer trade alerts.

How to read ATR indicator

The average true range indicator is a single line that moves up and down in a region beneath your chart. The ATR indicator is simple to understand: a greater ATR indicates higher volatility, while a lower ATR indicates reduced volatility. However, keep in mind that ATR does not provide hints about possible trend direction; rather, it simply displays price volatility. check chart,

Volatility is heightened during a stronger upward or downward price movement, as can be shown.

ATR indicator how can I use it?

The ATR is a valuable indicator since it depicts what happens when a certain asset's price volatility changes. Keep in mind, however, that the indicator should not be used as a stand-alone tool when creating an average true range trading strategy. You can use ATR in conjunction with price action analysis and other indicators to provide alerts regarding price direction and momentum.

Traders use the average true range indicator to identify possible breakouts and set stop-loss orders to prevent prematurely terminating their positions.

Alerts for ATR breakouts

The ATR indicator can also be used to look for breakout opportunities. Attempt to keep an eye on the ATR number and watch for a multi-year low. When you discover one, watch for the price to break through the support level, which indicates that volatility will rise and a breakout may occur.

The average true range formula can be used by traders to determine probable entry and exit points for their trading positions. Keep in mind that moments of high or low volatility will pass, and you can take advantage of this. For example, traders expect volatility to rise following a period of low volatility, and this could be a good time to enter or leave your position.

Stop-loss trailing

You can use an average true range technique to discover probable stop-loss or trailing stop-loss orders by using an average true range method. By using this indicator, you can avoid putting a small stop loss order during periods of high volatility or a very broad stop loss order during periods of low volatility. Take a look at the graph below to see why ATR can be utilised to place a stop-loss order.

The white arrows indicate periods of increased volatility, as well as price swings during certain periods (the white circles). By factoring the ATR into your trailing stop loss selections, you can ensure that the profit is locked in and that you don't set a tight stop loss, which could lead to an early exit.

You can set a suitable stop-loss in periods of decreased volatility (sideways market movement) to ensure that you receive a specific level of gains. The ATR number can be used as a base for defining your trailing stop, which is useful because volatility changes all the time. Your stop loss will also move. The stop loss can be activated depending on the set distance from the ATR value when the price action changes are not in your favor.

Aside from these basic uses, traders have devised a slew of average true range tactics for identifying and validating potentially profitable signals. They also feature the moving averages indicator to assess trend direction and the RSI indicator to evaluate momentum, in addition to the average true range.

When you position your stop-loss order below or above the support and resistance levels, you're using an ATR trading method for a stop loss. Traders commonly set the stop loss distance from the ATR value to one, two, or three times the ATR value. Of fact, this should not be seen as a rule, as traders develop their own average true range trading methods in addition to their basic trading tactics.