Summary

The Average Range Index (ATR) is a commonly used indicator in technical analysis, and its function is to estimate market volatility during a specific period. The Average Range indicator is a tool for determining volatility, a concept first introduced by technical analyst J. Welles Wilder Jr. in his 1978 book "New Concepts in Technical Trading Systems."

In a 14-day period, ATR can be used to calculate estimated price fluctuations of different true magnitudes and use this to determine the average value. While ATR has many benefits, including helping traders determine limit and stop loss prices, it does have some limitations.

Introduction

We all know that price fluctuations go hand in hand with trading, especially when it comes to cryptocurrencies. Traders often look to take advantage of these price movements and try to predict the direction. Using technical analysis and price volatility indicators like the Average Range Index (ATR) is one way to do this. For many traders, it is a valuable tool for understanding price movements and has added it to their technical analysis toolkit.

What is the average amplitude indicator?

In 1978, technical analyst J. Welles Wilder Jr. created the concept of ATR as a tool to measure volatility. . ATR has since become one of the most well-known measures of technical volatility.

Now, it is used by other market trend change identification indicators - such as the Average Trend Change Index (ADX) and the Average Trend Change Index Level (ADXR) - an important part of. Traders try to use ATR to determine the best period for trading swings.

This indicator calculates the average market price of an asset during a 14-day period. ATR does not provide trend information or price action, but rather shows price movements 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 worth noting that ATR only approximates price fluctuations and can only be used as an aid.

How to calculate the average amplitude indicator?

To calculate ATR, you must find the maximum true range, or TR, for a specific period. In other words, you need to calculate three different fluctuation ranges and choose the best one:

1. Use The current high price minus the current low price

2. The absolute value of the current high price minus the previous day's closing price (ignore any negative sign)

3. The absolute value of the current lowest price minus the closing price of the previous day

This period can vary depending on the trader's period of focus. For example, for cryptocurrencies this period could be 24 hours, while for stocks it could be one trading day. To determine the average amplitude indicator for a certain period of time (usually 14 days), it is necessary to calculate the true fluctuation range of each period and sum it, and then take a simple average.

After determining the ATR for the period in question, traders can understand the volatility of the asset's price during that time. Typically what traders see as ATR on a chart is a line. Below you can see that the ATR line rises when volatility increases (either price action).

Why do cryptocurrency traders use the Average Range Indicator?

Cryptocurrency traders often use ATR to estimate price volatility over a certain period. ATR is especially useful for the cryptocurrency industry due to the high volatility of the cryptocurrency market. A common strategy is to use ATR to set limit and stop-profit orders and limit-and-stop-loss orders.

When you use ATR to set limit price take-profit orders and limit price stop-loss orders, you can avoid market noise from affecting your trading strategy. When you are unsure about the long-term trend but want to trade, you don't want daily volatility to cause you to close your position prematurely.

A common practice is to multiply the ATR by 1.5 or 2 and then use this number to set a limit stop at your opening price Loss order. Daily fluctuations should not hit your stop-limit trigger price; if it does, it's a good sign that the market is declining significantly.

What are the disadvantages of using the average amplitude indicator?

ATR is characterized by adaptability and price change detection capabilities. Although ATR brings benefits to users, it has two main Disadvantages:

1. ATR can be interpreted differently. This can be a disadvantage because no ATR value can clearly indicate whether the trend will reverse.

2. Since ATR only measures price fluctuations, it will not notify traders when asset price trends change. For example, when ATR suddenly increases, some traders may believe that this is confirmation of an existing upward or downward trend, and this assumption may be wrong.

Conclusion

ATR is an important tool for many traders in understanding fluctuation patterns. Since volatility is a key consideration in cryptocurrency trading, it is particularly suitable for digital crypto assets. The beauty of it is that it is simple, but if you decide to use this indicator for trading, please be aware of its limitations.