Average True Range (ATR)
ATR stands for Average True Range.
The Definition: ATR is a technical analysis indicator that measures market volatility by averaging the asset's price range over a specified period (typically 14 days or bars).
- Why it’s unique: A standard "high-minus-low" calculation misses the volatility of gaps (when a stock opens significantly higher or lower than it closed the day before). ATR fixes this by incorporating the previous day's closing price into its formula to capture "hidden" volatility.
- How traders use it: Mainly to set smart stop-loss orders. Instead of picking a random percentage, a trader might set their stop-loss at "2x ATR" away from their entry price, ensuring they don't get shaken out by normal daily market noise.
Average True Range (ATR) is a technical indicator used to measure market volatility by accounting for the full high-low range of price candles.
ATR Expansion
Formula: ATR Expansion = Current ATR / Average ATR
When traders refer to an ATR Expansion (or volatility expansion), they are describing a scenario where a market suddenly transitions from a quiet period into a highly turbulent, fast-moving phase.
Here is what an ATR expansion describes in market behavior:
- Escaping the Trading Range: An expansion in volatility indicates that a stock is decisively breaking out and escaping its previous tight consolidation phase
- Explosive Breakouts: Markets constantly alternate between periods of low volatility (contractions or "squeezes") and high volatility (expansions).
While a low ATR extension identifies a "spring-loaded" market that is building up energy, the expansion describes the explosive breakout that follows when that energy is released.
The ATR expansion describes the profitable, high-momentum price surge you are hoping to catch immediately after your entry
Interpretation:
| Value | Meaning |
|---|---|
| > 1.3 | volatility expansion |
| 1.0 | normal |
| < 1.0 | volatility contraction |
| < 0.7 | strong contraction |
Compression Ratio
Formula: Current ATR / ATR 20 periods ago
Interpretation:
| Ratio | Meaning |
|---|---|
| > 1.5 | expanding |
| 1.0 | neutral |
| < 0.8 | compression |
| < 0.6 | strong compression |
| strong compression => Spring loading, Coiling, Volatility squeeze, Energy build-up |
Wyckoff Interpretation (Compression Ratio)
Compression often occurs during:
- Accumulation
- Distribution
- Re-accumulation
- Re-distribution
by itself it does NOT tell direction.
Only tells: Big move likely coming. Direction unknown.
Range Percent
Formula: (Highest High - Lowest Low)/ Lowest Low * 100
for the analyzed period.
Example: Stock: Low = 48.00 High = 49.50 Range = 3.12% Very little movement.
Interpretation:
| Range % | Meaning |
|---|---|
| < 5% | tight range |
| 5-10% | normal |
| 10-20% | trend |
| >20% | strong trend |
Combined with Compression Ratio
You have:
Compression Ratio = 0.589
Range = 3.12%
These support each other.
Both say: Market is compressed.
Realized Volatility
Formula: StdDev(Returns)× sqrt(252)× 100
Interpretation:
| RV | Meaning |
|---|---|
| <20 | very stable |
| 20-30 | moderate |
| 30-50 | aggressive |
| >50 | speculative |
value: 33% means: The stock is naturally volatile.
Current ATR
ATR measures average daily movement.
Interpretation ATR = 1.50 means: Price normally moves about: ±1.50 per day.
Example
Stock: Price = 30, ATR = 1.5
Expected daily fluctuation: 28.5 → 31.5
approximately.
Trading Use
Stop loss: 1 ATR = tight 1.5 ATR = normal 2 ATR = swing
Target: Need > 2 ATR reward
to justify risk.
Volume Ratio
Formula Typically: Current Volume/Average Volume
value: 0.0611
means: 6.1% of normal volume Example
Average: 1,000,000 shares
Today: 61,100 shares
Interpretation
| Ratio | Meaning |
|---|---|
| > 2.0 | huge interest |
| > 1.5 | strong |
| 1.0 | normal |
| < 0.7 | weak |
| < 0.3 | dead |
| < 0.1 | almost no participation |