Casestudy on ATR Bands for Trading Knowledge: Since 1978

 ATR Bands:

ATR stands for the average true range in the stock market. It is one of the leading indicators and favorite among traders. Today we will explain in depth these ATR bands indicator in simple language. 

It was introduced in 1978 by J.Welles Wilder in the book New concept in technical trading systems. It was made by Wilder for stopping those volatile stops in the market. These are used to find the best entry and exits in the Market. 

It measures price action and clarifies the market direction. It is the same as Bollinger bands. Experts say that “High volatility earns more while low volatility earns high”. 

In simple words, we can say that it shows the relationship between high and low bands. ✌✌

ATR Bands

How to Trade with ATR Bands?

The question for traders is how to make a profit from the cycle of volatility. The ATR does not tell us which direction the breakout will take, it can be added to the closing price, and the trader can buy when the next day's price is higher than that price. 

Trading signals are relatively short but usually have significant breakout points. The rationale behind these signals is that whenever the price closes higher than the recent ATR, the volatility changes. Taking a long position means that the stock will move upwards. ❤❤

Exit Sign of ATR: 

Traders can choose to exit this trade by creating a signal based on the ATR value. The same rule applies to this rule - when the price closes more than one ATR below the most recent close, there is a significant change in the shape of the market. 

Closing in the long position becomes a safe bet, as the stock is likely to enter the trading range or vice versa at this time.

ATR is commonly used as an exit method that can be applied no matter what the entry decision is. A popular technique is known as chandelier exhaust and was developed by Chuck LeBeau. Chandelier Exit The stock has put a stop below the highest since you entered the trade. 

The distance between the highest and stop level is defined as the ATR manifold. For example, we can reduce the value of an ATR by a maximum of three times since we entered the trade.

The value of this backward stop is that it moves upwards rapidly in response to market action. LeBeau chose the name of the chandelier because "just as the chandelier hangs down from the ceiling of the room, so does the exit of the chandelier hang from the high point of our business or below the ceiling."

ATR Bands

Profit of ATR in Trading:

ATRs, in some ways, are better than using fixed percentages because they change based on the characteristics of the stock, assuming that volatility varies according to the problem and market conditions.

As the trading range expands or contracts, the gap between the stop and closing price automatically adjusts and goes to the right level, eliminating the need to move the stock back to its normal range. The desire to protect the trader is balanced.

The ATR breakout system can be used by any time policy. They are especially useful as day trading strategies. Using 15-minute time, day traders add and subtract ATR from the closing price of the first 15-minute bar. 

This provides an entry point for the day, if the price returns at the end of the first bar of the day, a stop is placed to close the trade with a loss. Any time frame, such as five minutes or 10 minutes, can be used.

For example, this technique could use a 10-period ATR, which includes data from the previous day. Another difference is the use of multiple ATRs, which can vary infractions, such as half, maximum of three. 

(Furthermore, there are very few transactions to make the system profitable.) In his 1990 book "Day Trading with Short-Term Price Patterns and Opening Range Breakouts", Toby Crabbel showed that this technique can be applied to a wide variety of items and financial systems work. Does Promise.

Some traders adopt a filtered wave method and use ATR instead of percentages to identify market turning points. From this point of view, a new wave starts when the price moves the three ATRs from the lowest level. 

The new down wave starts when the price moves down the closest to the three ATRs since the upward wave started.

Options in ATR Indicator:

  1. Display Axis Label: If you want to display the recent value on Y-axis.

  2. Colors selectors: The color which is used on graph elements.

  3. Channel Fill: Shading the area between Bands.

  4. Period: No. of the bars to use in the columns list.

  5. Field: Base price for average calculations.

  6. ATR Bands bottom: ATR bands which are at a low position.

If share prices have touched the upper band then they can break out and rise more. 

If the share price has touched a lower band then the share price can give breakdown and fall more. 

Bottom Line: 

The possibilities of this versatile tool are limitless, as well as the profit opportunities for the creative trader. Monitoring is also a useful indicator for long-term investors because whenever the value of an ATR remains relatively stable for an extended period, they should expect a period of increasing volatility.

They will then be prepared for market volatility, which will help them avoid panic in a recession or move forward with irrational enthusiasm if the market declines rapidly.

Important Points of ATR: 

  • Plots are taken the next day, not on the same day.

  • By taking into consideration ATR daily closing prices are calculated.

  • It is the base and most trustable indicator among traders when it comes to finding price movements.

  • According to some data, more than 10 lakh traders in India use ATR Bands.  


These were all about ATR Bands used in Stock Market. They are spinal cord for traders. if you like our article on ATR Bands please do share it.

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