But you have an “exhaustion” move, the price coming into an area of Support, and a Bullish candlestick pattern that signals the market could reverse higher. The 80 pips target is your best option as it’s within the daily ATR value (and offers more than 30 pips). The 200 pips target is unlikely to be hit within a day (as it’s more than the ATR value). The 30 pips target is likely to be hit within a day but you’re leaving money on the table as the market could move 100 pips a day. Instead, combine it with market structure (like Support & Resistance, swing high & low, etc.) so you know where the price might reach for the day.

The ATR is a valuable technical tool for finding entry and exit points, particularly because it’s relatively straightforward to calculate and only requires historical price data. Although Wilder originally developed the ATR for commodities, the ATR indicator can also be used for various other financial instruments, including stocks, cryptocurrencies, or indices. In short, an asset experiencing a high level of volatility has a higher ATR. Conversely, lower volatility is characterized by lower ATR values for the period evaluated.

How to use ATR indicator to “hunt” for EXPLOSIVE breakout trades (before it occurs)

The distance from the high price to the trailing stop is usually set at three ATRs. Stops on long positions should never be lowered because that defeats the purpose of having a stop in place. Wilder was a futures trader at that time when those markets were less orderly than they are today.

• A sharp decline or rise results in high average true range values.
• Usually, your Average True Range calculation is based on 14 periods.
• You find that the highest values for each day are from the (H – L) column, so you’d add up all of the results from the (H – L) column and multiply the result by 1/n, per the formula.
• The average true range is non-directional; hence, an expanding range can be an indication of either short sale or long buy.

Below I set the ATR to 1 period which means that the ATR just measures the range/size of one candlestick. Below, we see the same cyclical behavior in ATR (shown in the bottom section of the chart) as we saw with Bollinger Bands. Periods of low volatility, defined by low values of the ATR, are followed by large price moves. How close together the upper and lower Bollinger Bands are at any given time illustrates the degree of volatility the price is experiencing. We can see the lines start out fairly far apart on the left side of the graph and converge as they approach the middle of the chart.

You know the ATR indicator tells you how much a market can potentially move for the day. How good the ATR is varies depending on the specific asset in question. However, if an asset typically maintains an ATR close to $1.18, we usually say it is performing normally. Knowing how to use the Average True Range in your trading can help you set better profit targets and stop losses by giving you a more accurate idea of how volatile security is. If it generally has an ATR of close to $1.18, it is performing in a way that can be interpreted as normal. If the same asset suddenly has an ATR of more than $1.18, it might indicate that further investigation is required.

Exhausted ATR

This is in stark contrast to other trend and momentum indicators such as the RSI or the STOCHASTIC indicator. This is also why the ATR may be a great additional confluence tool to provide a different way of looking at price movements and complement your price analysis. On the other hand, periods of low volatility—accompanied by investor complacency—can warn of frothy market conditions and potential market tops.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. So overall, we conclude that knowing how to use the average True Range can help you set better profit targets and stop losses, as it gives you a more accurate idea of a security’s volatility. Let’s assume you collected the prior 14-day ATR for asset ABC and found it is 2 dollars. Looking at today’s stock, you will first collect the following details. Wilder developed this indicator to measure the volatility of commodities like gold and platinum, but it can be used for stocks and indices.

True Range takes into account the most current period high/low range as well as the previous period close (if needed). “When the market hits 2 ATR or more within a day, it tends to be “exhausted” and could reverse”
This is a last point in your conclusion. When you say 2 ATR or more within a day what it means it’s in a day or in a candle ? The example you given in the weekly chart is showing within a candle.

FAQs about the ATR indicator

Furthermore, ATR is a subjective measurement not usable as a standalone indicator, giving you some insights of whether the price trend is about to reverse or not. We can think of a breakout as a move outside the defined support or resistance area. We can use average True Range breakout signals to identify potential buy and sell opportunities. On the other hand, when the indicator signals lower volatility, traders may use a closer stop loss.

Applying the Average True Range

This provides entry points for the day, with stops being placed to close the trade with a loss if prices return to the close of that first bar of the day. Volatility measures the strength of the price action and is often overlooked for clues on market direction. When the stock or commodity breaks out of a narrow range, it is likely to continue moving for some time in the direction of the breakout. The problem with opening gaps is that they hide volatility when looking at the daily range. If a commodity opens limit up, the range will be very small, and adding this small value to the next day’s open is likely to lead to frequent trading. Because the volatility is likely to decrease after a limit move, it is actually a time that traders might want to look for markets offering better trading opportunities.

The price volatility indicated by the average true range can be used by traders to determine the appropriateness of a trade. Suppose that the trading range for a stock is 1.40, and the stock’s moved up 40% above the average. The average true range is an indicator of the price volatility of an asset. It is best used to determine how much an investment’s price has been moving in the period being evaluated rather than an indication of a trend. Calculating an investment’s ATR is relatively straightforward, only requiring you to use price data for the period you’re investigating. The Ranges With Targets indicator is a tool designed to assist traders in identifying potential trading opportunities on a chart derived from breakout trading.

What is ATR? Average True Range as a Volatility Indicator

A prolonged time of low ATR values may indicate a consolidation area with the possibility of a continuation move or price reversal. Average True Range (ATR) is the average of true ranges over the specified atr volatility indicator period. ATR measures volatility, taking into account any gaps in the price movement. Typically, the ATR calculation is based on 14 periods, which can be intraday, daily, weekly, or monthly.

However, it also enables you to move the exit point, if the price is moving in your favor. The stock is up 3 dollars since the trading range is 3, with the price moving 47 percent more than average (2.07), which gives you a buy signal with this trading strategy. But the ATR can also provide general information about the underlying level of volatility of a market or the average price range for a specific period. Another popular use case for the ATR is to look for exhausted price movements. Since the ATR tells us the average range the price has moved over a given period, we can use this information to estimate the likelihood for trends to continue or stall. The Cboe Volatility Index is one of the most widely watched gauges of market volatility.