In: Finance
what risk will result in a higher ATR on average over time?
The average true range (ATR) is a technical analysis indicator that measures market volatility by decomposing the entire range of an asset price for that period. ATR is generally 14 days.
A stock experiencing a high level of volatility has a higher ATR, and a low volatility stock has a lower ATR. The ATR may be used by market technicians to enter and exit trades, and it is a useful tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction; rather it is used primarily to measure volatility caused by gaps and limit up or down moves.
There are two main limitations to using the average true range indicator. The first is that ATR is a subjective measure - meaning that it is open to interpretation. There is no single ATR value that will tell you with any certainty that a trend is about to reverse or not.
Second, ATR also only measures volatility and not the direction of an asset's price. This can sometimes result in mixed signals, particularly when markets are experiencing pivots or when trends are at turning points.
Briefly, high ATR over time means the the stock has become more volatile than the past. This can be due to market conditions or events in the organisation