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Average True Range – which days are used?


REKandler

Question

Which days are used to calculate today's average true range (ATR)?

For instance, if it's a 14-day average, then does today's ATR cover the 14 days ending with (and including) today, or does it mean the 14 days ending yesterday?

Logic suggests to me that today's ATR figure should cover the 14 days ending yesterday, as there is no meaningful data on the difference between today's high and today's low until today is over.

Or have I misunderstood?

Many thanks

Richard

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19 hours ago, REKandler said:

Which days are used to calculate today's average true range (ATR)?

For instance, if it's a 14-day average, then does today's ATR cover the 14 days ending with (and including) today, or does it mean the 14 days ending yesterday?

Logic suggests to me that today's ATR figure should cover the 14 days ending yesterday, as there is no meaningful data on the difference between today's high and today's low until today is over.

Or have I misunderstood?

Many thanks

Richard

Hi @REKandler

How to calculate the average true range

To calculate the average true range, you would first need to calculate the true range. You would do this by taking the largest of these three calculations:

  • The current high minus the previous close
  • The current low minus the previous close
  • The current high minus the current low

You would repeat this throughout a specific time frame to achieve a moving average of a series of true ranges. A 14-period moving average is recommended as a basis from which to work out the average true range, usually over a 10- to 14-day period. For shorter time frames – hours for example – it’s recommended to use between two to 10 periods; for longer time frames – weeks or months – 20 to 50 periods are recommended.

For the table below, the figures have been used to calculate a 14-day ATR over a 10-day period. The true range for each day was calculated as described in the bullet points above.

The first true range value – taken for 1 August – is simply the current high minus the current low because the previous close cannot be used, and the first average true range – taken for 14 August – is an average of the 14 previous true ranges. After that, to achieve each subsequent average true range you would multiply the previous 14-day ATR by 13, add the most recent day’s true range and then divide the result by 14.

  High Low Close True range Average true range
1 August 46.78 46.34 46.43 0.44  
2 August 47.32 46.64 46.87 0.89  
3 August 47.45 46.43 46.76 1.02  
4 August 47.20 46.83 46.92 0.44  
5 August 47.86 47.20 47.23 0.94  
6 August 47.90 47.27 47.49 0.67  
7 August 48.23 47.34 47.34 0.89  
8 August 47.90 47.23 47.43 0.67  
9 August 47.56 46.34 46.83 1.22  
10 August 47.45 46.34 46.47 1.11  
11 August 47.67 46.43 46.56 1.24  
12 August 47.69 46.83 47.32 1.13  
13 August 48.67 47.20 47.53 1.47  
14 August 47.99 47.47 47.78 0.52 0.90
15 August 48.32 47.47 47.63 0.85 0.90
16 August 47.97 47.41 47.56 0.56 0.88
17 August 47.98 47.21 47.33 0.77 0.87
18 August 47.89 47.46 47.64 0.56 0.85
19 August 48.34 47.55 47.87 0.79 0.84
20 August 48.32 47.87 47.98 0.45 0.81
21 August 48.39 47.56 47.84 0.83 0.82
22 August 48.11 47.25 47.37 0.86 0.82
23 August 48.02 47.67 47.79 0.65 0.81

From the ATR calculation, a trader can tell whether an asset is experiencing greater or lower volatility in a particular trading session. For this particular asset, the ATR remained below 1, and it moved within a narrow band of between 0.81 and 0.90 – meaning that it wasn’t experiencing high levels of volatility. As a result, this asset might be an attractive option for a trader who doesn’t have a large appetite for risk.

For the full article: Trading with the average true range indicator

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