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greeting traders and welcome back to
another in-depth with chris episode as
far as technical indicators go the tools
that we use as traders on a daily basis
or at least most of us do in the market
to get a better picture of what's going
on the two most common ways that these
indicators work is by taking a look at
an asset's price behavior over a period
of time or taking a look at the assets
volume but today we're going to talk
about something that takes into
consideration volatility this is the
average true range indicator otherwise
known as the atr it's a very simple
indicator to understand and hopefully
after the end of our discussion today
you'll have a better idea of if it's
worth investing your time but without
further ado let's dive on in to the
average true range
the average true range is an indicator
that takes into consideration how
volatile something currently is based on
how volatile it was the definition of
the atr the average true range is that
it's a volatility based indicator that
compares the current price to the entire
range for a particular period and down
here we actually have a picture of what
an atr would look like it is an
indicator that is generally displayed
below your price charts it's not
something that's going to overlay your
price charts the calculation for the
range can generally suppress volatility
most of us wouldn't be interested in or
could get confused by an example of this
is let's say yesterday's closing price
was fifty dollars and when the market
opened price gapped up to sixty dollars
if the day continued trading at and
above sixty dollars the calculation of
the range won't take into account the
jump from 50 to 60 dollars so really we
can think of the average true range as a
more refined version of a general range
while the range requires the high and
the low for the day the true range also
takes into account the previous closing
price as an input
as always if you're interested in the
exact math of how this indicator is
calculated or any indicator that we
discussed for that matter it will be
available in the article but for the
purposes of a more enjoyable watch we're
going to skip ahead to exactly how this
indicator works because once again the
indicator is going to do all of the math
for you so the atr is a measure of
volatility and assets with higher
volatility have higher atrs this should
be of no surprise and we can use the atr
to place trades based on how the asset
is behaving so if we were to think of
the average true range value as
something that increases when the price
is highly volatile then we're kind of
understanding the concept here during
consolidation periods the average true
range has lower value since it is a
volatility measure and there's less
volatility if the atr doesn't indicate
buying or selling pressure it simply
signals that there's really not a whole
lot going on
with this chart here it's an example of
how the average true range is visualized
because once again we have it on the
bottom of the screen below where price
actually is and this is what it's going
to look like on most trading platforms
the red line on the bottom is the
section that represents our atr line our
average true range line and we can
clearly see that there's three
noticeable peaks
across this chart these peaks are
evident of extremely high periods of
volatility and they're also evident when
there is a sharp rise or drop if you
look at the corresponding location on
the price chart since the atr peaks
from before these extreme price
movements actually occur
the technical indicator is commonly used
to figure out entry and exit points
because we can take a look at this and
have a better idea of perhaps what is
going to come or what is about to happen
it can even backwards explain why
something happened if you didn't have it
up in the first place and you want to go
back and look at an extreme price move
if you're wondering if this indicator
can be scaled down to smaller time
frames and be used to day trade the
answer is yes the default setting on
this indicator has a length of 14 but
the trader can change this according to
your personal preference now of course
we recommend taking a look at your
current market scape with the default
settings before you go changing them
around just to have some type of home
base so you understand how your change
is affecting the indicator itself but
the general rule of thumb longer lengths
are less reactive to price changes
whereas shorter lengths are more
sensitive so if the default setting is
14 and we increase it to 21 then we're
going to see less reactive movements to
price change and vice versa if we were
to lower it from 14 to say 7.
this is a price chart of tesla and we
can see a nice opportunity that was
presented here by the atr if we focus on
this spike here and we look at the move
that happened up here at the top we'll
understand what's going on and we have a
combination effect of the rsi and the
atr on the bottom of this particular
screen grab which is a good combination
we can use rsi to further confirm the
reads that we're getting from the atr in
conjunction with good old price action
what the candlesticks themselves are
actually doing the atr in this chart is
based on a single minute price point
however in the general case it could be
even shorter intervals than that since
the atr doesn't hint at the direction of
future price movements
the addition of the rsi is something
that can almost make it a little bit
more reliable for these forecasted
future moves that we're trying to pull
out of it any other indicator out there
that you understand could possibly be
used in conjunction with this because
once again we're only adding
future layers of confirmation and we're
not adding extra layers of complexity to
the indicator itself but the concept
here is during this spike on the atr
when we watched a hard spike it was
almost grinding downwards for a very
long period of time we almost have a
divergence here because price is
actually slightly curving upwards atr is
slightly curving downwards then massive
spike followed by
massive reaction in the market both up
and down after the forecasted direction
combine that with the massive spike of
the rsi which is right below it where we
moved above
the 70 range which is what most
considered to be a nice overbought
window at that point we could have
looked for a sell opportunity and down
the market went
to sum it all up the atr is a great tool
to add further insight into what's going
on or what might happen in the market
but it is not something that is going to
provide crystal clear clarity all on its
own and it shouldn't be used all on its
own as with all things it's a good idea
to take that new indicator that you're
learning about and throw it on some
practice charts and see how you interact
with it that's the most important thing
but the information that it does provide
is a bit unique and you may find it
valuable but you won't know till you try
good luck out there happy trading i'll
see you all very soon
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you