Average True Range (ATR) Indicator Explained Simply and Understandably. // stocks trading strategies strategy forex stop loss how to use options for calculation mt4 hindi david moadel
welcome to looking at the markets with David Modell today I wanted to discuss
ATR Average True Range now Average True Range is an indicator and it measures
volatility the volatility of a stock or commodity or ETF or whatever okay and by
volatility how big is the range of its movement does it make big moves has been
making big moves lately or has it just been kind of going sideways or just not
moving very far and when I say big moves it could be to the downside or the
upside either way its volatility whether it's big moves downwards or upwards and
so it's the average of this all right and by default the Average True Range
will measure the size of the most recent moves for the last fourteen periods or
fourteen candlesticks that are being measured on a candlestick chart so let's
take a look first of all we're going to look at very briefly at the calculation
you know the formula which it's from stockcharts.com I want to give them
credit there it is in case you're interested how to get the
Average True Range I think that knowing the formula is not the necessarily the
most important thing just understand that honest default settings it's
divided by fourteen because it's 14 day but they can adjust it you can adjust it
for different periods if you want it to look back more than 14 days to get the
average volatility or less than 14 periods okay so there it is there's a
formula in case you're interested in that alright but I'd rather look at some
examples and show you how it can be used for me if I'm going to use it mostly I'm
going to use it for options trading knowing when to sell calls or sell puts
or call spreads or put spreads if you want to limit your max loss there you
can use spreads all right so here's an example and this is from stockcharts.com
want to give them credit and here is a daily candlestick chart so as you can
see it can be used for swing swing trading with the daily candlestick chart
each of these candlesticks represents one day of price action and here it is
the average true range and by default it's on the 14 period and how do you get
that well on stockcharts.com you go down to indicators the indicators section and
you go through them all and you look for Average True Range ATR you put it up
there it automatically puts 14 period for you but you can change that if you
want to and then you click update all right so there it is I already do that
for you and this is Tesla and yet when the volatility becomes extreme when
these size the average recent size of the move of the candlestick moves in the
last 14 candlesticks becomes extreme that's what I like to sell options
because you get paid a lot more when volatility picks up as opposed to if you
try to sell options when the stock is just kind of drifting or going sideways
so when when the Average True Range reached an extreme here when it went way
up to nearly the top here because there was such a large series of down moves in
in the last you know at least at this point in the last 14 periods it really
went down sharply and fast that's volatility picking up and so if you want
to use the indicator you could say okay if this gets up to a certain point just
pick your number or pick your level when it gets up past or at a certain point
you could say I'm gonna fade the move if it's a big downward move when volatility
picks up and the average to range goes really high then you can sell puts
imagine if you had sold puts right when it reached here okay if you had sold out
of the money puts maybe here when it went down to about 308 if you had sold a
290 put or 295 put maybe even a 300 foot 300
strike put you know if you don't mind more risk you can pick your strike price
here you would have done quite well because then things calmed down and even
drifted upwards quite a bit okay so if you had sold an out of the money put
option here okay below you know if it went down to
308 if you sold a you know put options at a strike price here you would have
profited quite well alright and again here volatility picked up and you could
have sold and since it went down so much you could have sold a put option with a
strike price of 300 to 90 to 95 you pick it and you would have profited again
because things calmed down it the investor is calmed down and stopped
dumping the stock and it went right back up
alright so that's an example with Tesla let's look at another example with Nike
now here's an example where the average True Range can reach an extremely high
level not because the stock went down a lot but because it went up a lot okay so
you can sell a call option in that case so if you decided okay when the average
to arrange gets to a certain level when it gets almost up to the top I can fade
the move again and so you it reached around let's say 59 and 50 Cent's this
is Nike stock daily candlestick chart you know a coat could have sold a let's
say a 60 to 50 strike call option or even a 60 strike call option but I
recommend going out of the money so I what is sold probably a 60 to 50 maybe
even a 65 strike call option if I were you know if I didn't want to take on so
much risk and you could have made money there because after that the volatility
it calmed down as you can see in the average - range because the stock
stopped going stock price stopped going up so quickly
volatility calmed down it went down and the stock just kind of fizzled out and
chopped around sideways and it even went down after that okay so you can fade the
move either to the upside or the downside but Average True Range will
you when volatility is really reaching an extreme level and that's a time when
I like to sell options you can also use this for day trading or intraday trading
as they call it this is trading view dot-com and you can use this this is a
good one for many time frames but it's a really good one
I think at least for day trading this is Apple and it is a five-minute
candlestick chart each of these candlesticks represents not one day but
only five minutes and you can see again you put on the Average True Range okay
and you can do that by going to indicators it's right here it's a little
chart looking thing and you would click on that and then you would click on
Average True Range and that would give it to you all right and would put it
right here and as you can see volatility reached an extreme level you just pick
how high you'd want it to go before you can possibly sell put options or call
options in this case you would fade the move you by faith the move I mean it
goes a lot you know goes way way way down very fast and you decide you know
what I'm gonna bet that it's gonna either go upwards or at least sideways
or or perhaps downward yes but not much more so you could have sold and out of
the money put option here below where it was make the strike price below the
current price and let's say you put it you know down here and you would have
done okay because it went you know it just kind of drifted around it didn't go
down much more alright so you know again when volatility really picks up that's a
great time at least I think it's a great time to sell options but be careful
don't get extreme when it comes to selling options sell only a small number
of contracts you can make them option spreads and you know vertical spreads
calendar spreads whatever you like you want to limit or define your risk at all
times and don't ever bet any money or gamble any money that you cannot afford
to lose all right and please make your own decisions all right so that's what
Average True Range does for me I'm sure it has other uses but the
is the only use that I found to be extremely reliable because it is just a
volatility indicator notice that isn't it is not a directional indicator
because over here the average True Range went up but the stock went down over
here the average True Range went up but the stock went up so it's not a
directional indicator please do not try to use it as that some people use the
Average True Range to indicate that there is strength behind a move that
there's conviction behind a move but personally I think that a better
indicator for that in many cases would be just volume just you know put the put
the volume up on the chart and use that as a strength or conviction you know to
indicate that there is in fact strength or conviction behind the move or lack of
it as opposed to Average True Range although if you do use Average True
Range as a conviction indicator successfully that's fine I'm not against
it I just prefer to use volume for that all right so I hope this was helpful to
you and if you need more help with trading or investing my name is David
Modell you can contact me anytime by email at David Modell at gmail.com if
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