Average true range (ATR) is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities. The indicator does not provide an indication of the price trend, simply the degree of price volatility. The average true range is an N-day smoothed moving average (SMMA) of the true range values. Wilder recommended a 14-period smoothing. The idea is to take the close into account to calculate the range if it yields a larger range than the daily range (High – Low)
TR = Max[(H − L),Abs(H − CP),Abs(L − CP)]
ATR = (1/n)*i=1nTRi
TRi = A particular true range
n = The time period employed
How to use
Since ATR measures volatility, it is difficult to define a proper bearish or bullish scenario. To simply put in words, a stock having high volatility will have a high ATR value and low volatility will have a low ATR value. Since it does not indicate the price direction, rather it is used primarily to measure volatility caused by gaps and limit up or down moves.
Building on Mudrex
Since it only tells volatility we can compare two different ATR values to generate Buy/Sell signals. If the shorter time period ATR value crosses up the longer time period means that recently the price is more volatile and vice-versa.
- Buy:- ATR crosses down ATR
- Sell:- ATR crosses up ATR
- Time Frame:- 6H
- Stop Loss:- 10% (Trailing)
Creating on Mudrex
Components:- We will need 2 compare blocks, one to generate buy signal the other to sell.
For Buying, we will use the following setting:-
For Selling, we will use the following setting:-
Running on Binance Futures: BTC/USDT with tick interval of 6H yielded an overall profit of 12.96%
Since ATR is a volatility indicator pairing with a momentum or oscillator trend indicator could generate better signals