Average True Range: Using the ATR Indicator in Your Trade Exit Strategy
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Thinkorswim (TOS) Tutorial: Adding ATR and Expected Move to Chart corner
Adding ATR and Expected Move to Chart corner on Thinkorswim
Last update: June 2021
In this Thinkorswim Tutorial (TOS), Coach Gino Poore teaches you how to add ATR and Expected Move to Chart corner.
Here is the data to copy and paste:input ATRLength = 14; def ATR = Round(AvgTrueRange(high, close, low, ATRLength), 2); def iv = Round(close() * (imp_Volatility()/15.87), 3); addLabel(yes,concat("ATR=", ATR), color.Yellow); addLabel(yes,concat("ExpM=", iv), color.Yellow);
It will bring up a message from Thinkorswim.
Click the tab in the lower left corner that says “View in Thinkorswim” › Save the chart under Studies › Then save study set.
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How Average True Range (ATR) Can Improve Your Trading
How ATR Can Aid in Trading Decisions
Day traders can use information on how much an asset typically moves in a certain period for plotting profit targets and determining whether to attempt a trade.
Assume a stock moves $1 a day, on average. There is no significant news out, but the stock is already up $1.20 on the day. The trading range (high minus low) is $1.35. The price has already moved 35% more than the average, and now you're getting a buy signal from a strategy. The buy signal may be valid but, since the price has already moved significantly more than average, betting that the price will continue to go up and expand the range even further may not be a prudent decision. The trade goes against the odds.
Since the price is already up substantially and has moved more than the average, the price is more likely to fall and stay within the price range already established. While buying once the price is near the top of the daily range—and the range is well beyond average—isn't prudent, selling or shorting is probably a good option, assuming a valid sell signal occurs.
Entries and exits should not be based on the ATR alone. The ATR is a tool that should be used in conjunction with an overarching strategy to help filter trades.
For example, in the situation above, you shouldn't sell or short simply because the price has moved up and the daily range is larger than usual. Only if a valid sell signal occurs, based on your particular strategy, would the ATR help confirm the trade.
The opposite could also occur if the price drops and is trading near the low of the day and the price range for the day is larger than usual. In this case, if a strategy produces a sell signal, you should ignore it or take it with extreme caution. While the price may continue to fall, it is against the odds. More likely the price will move up and stay between the daily high and low already established. Look for a sell signal based on your strategy.
You should review historical ATR readings as well. Even though the stock may be trading beyond the current ATR, the movement may be quite normal based on the stock's history.
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Indicator thinkorswim atr
The Average True Range (ATR) study calculates the average true price range over a time period. True range is the greatest of the following:
- the difference between the current high and the current low
- the difference between the current high and the previous close
- the difference between the previous close and the current low
By default, the average true range is a 14-period Wilder's moving average of this value; both the period and the type of moving average can be customized using the study input parameters.
|The number of bars used to calculate the ATR.|
The type of moving average to be used in calculations: simple, exponential, weighted, Wilder's, or Hull.
|The Average True Range indicator.|
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.
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