A moving average with a upper band 2 standard deviations above the moving average and a lower band 2 standard deviations below the the moving average.
Measures market volatility by calculating the average range between the high and low prices over a specified period. Developed by J. Welles Wilder and designed with commodities and daily prices in mind. Strong moves, in either direction are often accompanied by large ranges or large “true” ranges. Commonly used to set stop-loss levels and determine the size of potential price movements.
A moving average of “True Ranges”. True range is the greatest of the following:
An average true range value is the average price range of an investment over a period. So if the ATR for an asset is $1.18, its price has an average range of movement of $1.18 per trading day.
$$ ATR = \frac{1}{n} \sum_{i=1}^{n} \max(\text{High}_i - \text{Low}_i, \; |\text{High}i - \text{Close}{i-1}|, \; |\text{Low}i - \text{Close}{i-1}|) $$
Traders often use ATR for comparative analysis. If the ATR is higher for one stock compared to another, it implies its more volatile. ATR can be used to confirm the strength of a trend. If there is a strong uptrend, ATR might increase, indicating increased volatility in the direction of the trend. Can be used to identify potential support and resistance levels. Breakouts with high ATR values may indicate the beginning of a new trend.
Can be used for stop losses and take profit levels. Here’s an example:
For setting, take profit its the same thing except backwards.
*Side note on setting the multiplier based on your risk-reward ratio:
Risk/Return Ratio = Potential Loss / Potential Gain