ThE hAnDbook of TEChnICAl AnAlysIsis done, a rolling average based on Wilder’s averaging method is calculated as
follows:
Average True Range=((Previous ATR 13×+) NewTR 14) /Therefore, it is obvious that the ATR reflects the degree of volatility in price
fluctuations. The choice in the number of lookback periods applied is also depen-
dent on market behavior. ATR is usually used:
■ (^) As a price filter for determining stopsize
■ (^) As a price filter for confirming a breakout
There are various ways of employing the ATR for stopsizing, some of which are:
■ (^) Using multiples of the current ATR value to size a stop
■ (^) Using locational ATR values, that is, ATR with a lookback period that specifi-
cally focuses on the immediate area of a price reaction
■ (^) Using a 2‐sigma threshold level over a specified number of periods as a filter
for selecting an ATR value to size a stop
Traders normally use multiples of ATR to size stoplosses, some of which are:
■ (^1) × ATR
■ (^) 1.5 × ATR
■ (^2) × ATR
■ (^4) × ATR
More advanced traders use some multiple of either an average or simply the
highest ATR value that exceeds the 2‐sigma upper Bollinger band filter level. In
figure 21.22 Definition of True Range.