subject: Advantages of Average True Range (ATR) [print this page] Advantages of Average True Range (ATR) Advantages of Average True Range (ATR)
There are 2 main reasons that made the Average True Rage (ATR) remain popularly used with many trading systems through the decades. The ATR is a remarkable measure of market price movement because it can be used across different financial securities and it also adapts to changing market volatility. Because of this, it plays a vital role in setting your stops or take profit levels.
Useful Across Different Financial Securities
A system that can only be used to trade in one market can be used to trade other markets just by changing the way the calculations are expressed. Using units or multiples of ATR instead of using definitive values such as dollars, points or pips can turn any simple system into a universal trading system.
One of the most common uses of the ATR is setting the stop loss level. Below is a typical scenario of how the ATR can be applied to set your stop for different financial instruments.
Adaptive To Changing Market Conditions
Substituting units or multiples of ATR to the usual dollar, point, pip or whatever units of measure used in your system can make it remain applicable in the long run without reoptimization despite any changes in price movement or volatility.
We are well aware that market conditions and, consequently, price movement or volatility, can change and will change either abruptly or gradually. Since the ATR changes in direct proportion to changes in volatility, it can easily bring your stop closer or farther to allow enough space for price movement normally expected for that particular volatility level. Unless the market has changed in direction, you will not be stopped out.
That is the essence of using the ATR in any trading system. Because it can adapt to change and can be used with different markets without altering its value, it significantly cuts off a big chunk of hard work when looking into different markets and its accompanying fluctuations in volatility.
Most systems that use the ATR are applicable not only in the past and the present, but also in the future despite any changes in market volatility.
