Lead
It’s no secret that trading price fluctuations go hand in hand with trading, especially when it comes to cryptocurrencies. Traders usually look to take advantage of these price movements and try to predict where they are headed. The use of technical analysis and price volatility indicators such as the Average Range Indicator (ATR) is one way to do this. For many traders, it is a valuable tool for understanding price fluctuations and has added it to their technical analysis toolkit.
What is the Average of Range?
In 1978,Technical AnalystJ. Welles Wilder Jr. coined the concept of ATR as a measure of volatility. Since then, ATR has become the most well-known technologyVolatilityOne of the metrics.
It is now an important component of other market trend change identification indicators, such as the Average Directional Change Index (ADX) and the Average Trend Movement Index Rating (ADXR). Traders try to determine the best period for trading volatility with ATR.
The indicator calculates the average market price of an asset over a 14-day period. ATR does not provide trend information or price movements, but rather shows how the price fluctuated during the period. A high ATR means high price volatility for a given period, and a low ATR means low price volatility for a given period.
Traders consider the level of price volatility when determining whether to buy or sell an asset during this period. It is important to note that ATR only tends to price fluctuations and can only be used as an adjunct.
How is the average range calculated?
To calculate ATR, you must find the maximum true volatility or TR for a specific period. In other words, you need to calculate three different fluctuation amplitudes and choose the best one among them:
Subtract the current low from the current high price
The absolute value of the current high price minus the previous day’s closing price (ignoring any negative signs)
The absolute value of the current low price minus the previous day’s closing price
This period can change depending on the trader’s focus period. For example, in the case of cryptocurrencies, this period can be 24 hours, while in the case of stocks, this period can be one trading day. To determine the average for a period of time (usually 14 days), you need to calculate and sum the true volatility for each period, and then take a simple average.
Once the ATR for the said period is determined, the trader can understand the volatility of the asset’s price during that period. Usually the trader is inchartThe ATR seen on is a line. As you can see below, the ATR line rises when volatility increases (either price action).
Why do crypto traders use the Average Range Index?
CryptocurrenciesTraders usually use ATR to estimate price volatility over a certain period. Due to the high volatility of the cryptocurrency market, ATRs are especially useful for the cryptocurrency industry. A common strategy is to set it up with ATRStop-Limit and Stop-Limit orders。
When you set up stop-limit and stop-limit orders with ATR, you can avoid market noise affecting your trading strategy. When you’re unsure of the long-term trend but want to trade, you don’t want daily volatility to cause you to close your position prematurely.
It is common practice to multiply the ATR by 1.5 or 2 and then use this number to set a stop-limit order at the price at which your position was opened. Daily volatility should not touch the stop-limit trigger price you set; If it does, then it’s a good sign that the market is falling sharply.
What are the disadvantages of using the Average Range indicator? ATR is characterized by adaptability and the ability to detect price changes, and while ATR brings benefits to users, it has two major drawbacks:
1.ATR can be interpreted differently. This can be a disadvantage, as there is no single ATR value that gives a clear indication of whether the trend will reverse or not.
2.Since ATR only measures price fluctuations, it does not notify traders when the price movement of an asset changes. For example, when there is a sudden increase in ATR, some traders may think that this is confirming an existing uptrend or downtrend, and this assumption may be wrong.
epilogue
ATR is an important tool for many traders to understand wave patterns. Since volatility is a key consideration in cryptocurrency trading, it is particularly well-suited for digital cryptocurrency assets. The advantage is that it is simple, but if you decide to use this indicator when trading, be aware of its limitations.