HOW TO MEASURE STOCK VOLATILITY WITH AVERAGE TRUE RANGE

Stock Market | Published on Sep 12th 2016 | Comment(s) 0
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Let’s begin by defining average true range(ATR). A particular stock’s range can be measured in terms of the difference between its highest and lowest price on a particular day. It shows the stock’s volatility. A large ranges indicates high volatility while a small range indicates low volatility. This range also applies to both commodities  and options – the high minus the low.

A notable difference between commodity and stock markets is all major exchanges prevent highly erratic price movements by slapping a ceiling on the total amount movable by a market in one day. Called the lock limit, this reveals the maximum change recorded in one particular commodity’s price in a single day. It is important to note that high volatility follows low volatility and vice versa. Low volatility can be calculated by making a comparison of the daily range against a moving average over 10 days for that particular range. When the range today happens to be less than its 10-day average, then the range’s value may be added to its opening price and a breakout may be bought. When a stock breaks from its narrow range, it generally continues moving towards a breakout. Opening gaps usually pose the problem of hiding volatility when a daily range is looked at.

Most traders are of the firm opinion that volatility reveals clear cycles. Based on this premise, ATR may be used for setting up entry signals. Breakout systems based on ATR are used by traders for timing entries in the short-term. The system adds the average true range, or multiples of it, to the following day’s opening price and leads to buying when prices shoot above the level. The opposite happens in the case of short  trades. The average true range or its multiple is deducted from the opening price with entries occurring when the level gets broken.

The average true range is also usable to plant stops for strategies on trading because this strategy works on any entry type used. Average true range forms the base of stops planted in the famous turtle trading mechanism. Another notable instance of stops that use the Average True Range happens to be “chandelier exit” that Chuck LeBeau developed, and which plants the trailing stop from the highest of the high in the trade or at the highest close which the trade records. This distance measured from the highest price to the end of the trailing stop is usually set at 3 Average True Ranges. It gets pushed upward with prices going higher.

Let’s begin by defining average true range(ATR). A particular stock’s range can be measured in terms of the difference between its highest and lowest price on a particular day. It shows the stock’s volatility. A large ranges indicates high volatility while a small range indicates low volatility. This range also applies to both commodities  and options – the high minus the low.

A notable difference between commodity and stock markets is all major exchanges prevent highly erratic price movements by slapping a ceiling on the total amount movable by a market in one day. Called the lock limit, this reveals the maximum change recorded in one particular commodity’s price in a single day. It is important to note that high volatility follows low volatility and vice versa. Low volatility can be calculated by making a comparison of the daily range against a moving average over 10 days for that particular range. When the range today happens to be less than its 10-day average, then the range’s value may be added to its opening price and a breakout may be bought. When a stock breaks from its narrow range, it generally continues moving towards a breakout. Opening gaps usually pose the problem of hiding volatility when a daily range is looked at.

Most traders are of the firm opinion that volatility reveals clear cycles. Based on this premise, ATR may be used for setting up entry signals. Breakout systems based on ATR are used by traders for timing entries in the short-term. The system adds the average true range, or multiples of it, to the following day’s opening price and leads to buying when prices shoot above the level. The opposite happens in the case of short  trades. The average true range or its multiple is deducted from the opening price with entries occurring when the level gets broken.

The average true range is also usable to plant stops for strategies on trading because this strategy works on any entry type used. Average true range forms the base of stops planted in the famous turtle trading mechanism. Another notable instance of stops that use the Average True Range happens to be “chandelier exit” that Chuck LeBeau developed, and which plants the trailing stop from the highest of the high in the trade or at the highest close which the trade records. This distance measured from the highest price to the end of the trailing stop is usually set at 3 Average True Ranges. It gets pushed upward with prices going higher.

Long position stops should ideally never be forced to be lowered as it defeats the very purpose of having the stop in its appropriate place. It is proven that the average true range is truly a most versatile tool for traders to measure volatility and provides exit and entry locations. Moreover, a full trading system is buildable from this one singular idea. It’s truly an effective indicator that all market operators need to study diligently and which will only help them get the best results in the long term.

Long position stops should ideally never be forced to be lowered as it defeats the very purpose of having the stop in its appropriate place. It is proven that the average true range is truly a most versatile tool for traders to measure volatility and provides exit and entry locations. Moreover, a full trading system is buildable from this one singular idea. It’s truly an effective indicator that all market operators need to study diligently and which will only help them get the best results in the long term.

 

 

 

 




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