In 1978, J. Welles Wilder Jr., an American technical analyst, created the average true range, a moving average. ATR is a technical analysis indicator that crypto traders use to determine asset price volatility over a particular timeframe. Wilder’s text, called “New Concepts in Technical Trading Systems,” contains a more detailed explanation of how to calculate the ATR.
Although the ATR volatility indicator was initially developed by Wilder to analyze commodities markets, it is currently used for assessing stocks, indices, and forex pairs, among other things.
However, it is important to note that the average true range does not show price trends or direction. Rather, it computes an asset’s average price change over several periods, including any gaps.
ATR Formula and Calculation
The average of the true range for a given period is what we use to compute ATR. In turn, the maximum of the three values listed below is the true range:
- The difference between the present low and high.
- The absolute value that divides the current high and the previous close.
- The exact value that differentiates between the current low and the previous close.
The Average True Range (ATR) gives traders a clear view of the recent price swings in the market by averaging the true range values across a selected timeframe.
The following is the ATR formula:
Current ATR = ((Previous ATR x 13) + Current TR) / 14
How Does Average True Range Work in Crypto Trading?
Although a lot of indicators from conventional markets, such as stocks or Forex, can be used in cryptocurrency trading, the ATR is particularly useful. It quantifies volatility or price swings regardless of the kind of asset—stocks, commodities, or cryptocurrencies. Given the significant fluctuations in volatility in the crypto space, its effectiveness is notable.
Nonetheless, it is important to understand that the ATR is primarily used for gauging volatility rather than to recommend buying or selling positions.
The ATR indicator estimates the market’s average price for assets over 14 days. While lengthier durations are more likely to produce fewer trading signals, traders can use time frames shorter than 14 days to generate more trading signals.
During the chosen period, a low ATR signals low price volatility, and a high ATR suggests strong price volatility. Traders can consider these high or low price volatilities when determining whether to purchase or sell an item within the given period.
Understanding The Role Of ATR In Crypto Trading
Setting suitable stop-loss and take-profit levels is one of the main uses of ATR for traders. Traders can determine how much price movement is usual for a specific crypto within a given timeframe by examining the ATR value.
ATR can help traders choose the best times to enter and exit the market. A high ATR indicates a more volatile market, which could offer short-term traders opportunities. On the other hand, a low ATR indicates a calmer market, which may support longer-term approaches.
ATR is also a very important factor in figuring out the right size of a position. Traders can use the ATR to alter the size of their positions, making sure they don’t take on too much risk in a very unpredictable market.
However, even while the ATR is an effective tool, it does not provide clear entry signals—rather, it merely provides useful information. Thus, to maximize its usefulness, the ATR needs to be examined in conjunction with a trading strategy.
Takeaways
In crypto trading, the ability to navigate through volatile market conditions is crucial. With the use of the Average True Range (ATR), traders can improve their trading methods, make better judgments, and effectively manage risk.
