Rich Dad Education Blog

The true range simply calculates one day’s range. The ATR looks at the last 14 days (the default) to calculate the average true range over that time frame. If you want to look at the ATR over a longer or shorter time frame, such as the last seven days or the last 30 days, you can adjust the settings to reflect any number of days. Although I used a daily chart in my example, you can use the ATR on any time frame (weekly, hourly, five minutes, etc.) to determine the average movement per price bar.

One of the initial benefits of using the ATR is that it gives you a glimpse into the personality of the stock by telling you how much the stock typically moves per day. You can use this as a filter to make sure you’re trading stocks that you are comfortable with. For example, if you only want to trade stocks that move at least $1 a day, then make sure the ATR is $1 or higher. Unlike the Stochastic, MACD, RSI, and other popular indicators, the ATR is not used to forecast direction or to provide buy and sell signals. It merely measures volatility. High ATR levels signify large swings in price, while low ATR levels signify quiet, smaller moving markets. Sometimes extreme levels (high or low) in the ATR coincide with reversal points in a trend. High ATR levels would correspond with market bottoms, while low levels would correspond with market tops.

ATR can also be used to project targets, particularly for shorter-term trades. Suppose I buy stock XYZ at $50 and it has a daily ATR of $2.50. If I was looking to set a realistic target for a short-term one- or two-day trade, I could simply add one ATR to my entry price, which would put my target at $52.50 ($50 + $2.50). Using ATR is a more realistic and efficient way of selecting short-term targets than picking some random, arbitrary number.
The ATR can be added to the EduTrader Charts by right clicking on the price chart and going to “Add Study” in the drop down menu, then selecting “Average True Range (ATR).”