The ATR is an indispensable tool for good trading system designers, and it has been described as a true pawn in technical indicators. Every system trader should be familiar with the ATR and its many useful functions. Its many applications include: parameter setting, market entry, stop loss, profit, etc., and even a very valuable auxiliary tool in money management.
How to calculate the mean of the true amplitude of oscillation (ATR) The amplitude of the oscillation: the distance between the highest and lowest points of a single-core K-line chart. True amplitude: the largest of the following three amplitudes:
Short-term ATRs (2-10 K-strands) can be used to make the ATR reflect near-term volatility; long-term ATRs (20-50 K-strands) or more can be used to make the ATR reflect long-term volatility.
The ATR is a general indicator for assessing market price movements and is a true adaptive indicator. The following example helps explain the importance of these characteristics. If we calculate the average price fluctuation of corn over two days, say $500; the average price fluctuation of a yen contract may be $2,000 or more. If we set up a trading system to set the appropriate stop loss level for corn or yen respectively, we will see that the stop loss level for the two is different, because the volatility of the two is different. We may set a stop loss level of $750 on corn and $3,000 on a yen contract. However, we can assume that in the above example, the two-day real volatility average (ATR) of corn is $500 and the two-day real volatility average (ATR) of the yen is $2,000. If we set the stop loss level to 1.5 times ATR (i.e. the stop loss level represented by ATR), we can use the same standard in both markets (i.e. 1.5 times ATR), and the stop loss level for corn will be $750 and the daily stop loss level will be $3,000. Now let's assume that the market conditions have changed, that the volatility of the corn is very high, that it moves $1,000 in two days; and that the yen has become very calm, that it moves only $1,000 in two days. If we still use the previously expressed stop loss level in dollar terms, that is, the corn's stop loss level is still set at $750 and the yen's stop loss level is still set at $3,000, then the corn's stop loss level is now too close to the stop loss level, and the yen's stop loss level is set too far away. However, the stop loss level expressed in a multiple of the ATR can adapt to changes in the market, and the stop loss level of 1.5 times the ATR will automatically adjust to the loss level of the corn and the loss level of $1,500 in dollars, respectively. The stop loss level expressed in the ATR can automatically adapt to changes in the market, while not changing the previous standard, and the standard is 1.5 times the same as the previous standard. The utility value of ATRs as a general and adaptable indicator of market volatility is certainly not overstated. ATRs are very valuable for building robust trading systems (i.e. trading systems that may be equally effective in the future) and they can be used without modification in multiple markets. Using ATRs you can design a system that is both applicable to the corn market and equally applicable to the yen market without any modification.
The use of the ATR indicator in position management has already been described in the article on average true wavelength (ATR). However, the ATR indicator is by no means limited to modern technical analysis and money management.
If you don't know what the average true wavelength is yet, here is a brief introduction again. To calculate the ATR, you first need to calculate the true wavelength.
In short-term trading, many investors hold two or more stocks at the same time. How to allocate funds between multiple stocks? The same division is the method most people choose. If you are ready to buy both stock A and stock B at the same time, with 100,000 yuan in hand, then buy 50,000 yuan each. This algorithm is simple, but there is a major problem because different stocks are different, some very active fluctuate greatly, but some often fluctuate. To solve this problem, the ATR can be used to allocate funds, as long as we make a fixed percentage of all funds correspond to the fluctuation of 1 ATR of a stock. For example, the 50 ETF above, on Thursday, the ATR is 0.152 yuan, equivalent to 4.08% of the closing price; while the Citigroup securities, on Thursday, the ATR is 4.741 yuan, equivalent to 6.69% of the closing price, then the indicator is more active than the previous one. Assuming that the hand has 1 million dollars of funds, we can set the volatility of the above two stocks at 1 ATR to be equal to 1% of the total fluctuation of the capital, so that 1% of the 1 million is equal to 110,000 yuan, 10000.150.152 = 659.7847, we should invest 65700 shares in the 50 ETF, according to the price of the 72.213.73, which involves the distribution of capital between the two stocks; we should not be affected by the price of the two stocks, i.e. we should be able to buy and sell shares at the same time,
Unless you're an absolute value investor like Buffett, it's extremely important for investors to set up stop losses. A 10% loss can only be made up for by an 11% profit, a 20% loss can only be made up for by a 25% profit, a 50% loss can only be made up for by a 100% profit. Using a fixed ratio as a stop loss is easy, but the problem is the equity difference mentioned above. If a lower volatility variety such as the 50 ETF and a higher volatility variety such as the CCI securities both choose 8% as a stop loss line, it is obviously not very reasonable. At this point, the ATR is a useful weapon. Using the ATR to set a stop loss is actually very simple, generally it is to choose a benchmark price, and then subtract a coefficient adjusted ATR. For example, some investors prefer to choose the closing price of the previous day, some investors prefer to choose the highest price of the previous day as a benchmark price, as for the subtracted value, fast-moving traders will choose 0.8, and those who prefer to do long-line trading will choose 2 or even 3. Or, for example, if an investor is ready to buy on Friday after the close of the market, then the ATR can be used to calculate the stop loss price at the same time. The investor can choose the closing price of 70.85 yuan on Thursday as a benchmark, and if the buyer is quick to move forward, then subtract 0.8 x ATR, i.e. 0.8 x 4.741 = 3.768 yuan, if the ZTE stock falls more than 5.3%, the price falls above 67.08 and stops the loss. By comparison, if you buy 50 ETFs, also using 0.8 coefficients, then according to the closing price of 3.721 yuan and 0.152 ATR, 0.8 x 0.152 = 0.12 yuan, the price of the ETF fell earlier, i.e. 3.27%, the stop loss is 3.60 yuan.
For investors who use the ATR to allocate funds to set up IPO funds, another effect of the ATR is the ability to dynamically adjust the position. In the previous case, a total of 65,700 shares were purchased in the ATR 50 ETF, involving an example of 244,000 shares, in accordance with 1% of the capital = 1 ATR. For example, if the 50 ETF is listed after the purchase, this variety will be sold on a long-term basis, neither a big rise nor a big fall, at which time the ATR will fall further, for example, from 0.152 to 0.120 yuan, the investor will recalculate the position. Experienced investors understand that long-term settlement is often a sign of a big trend. If downward, because the investor sets a stop loss according to ATR, if the stop loss is set at 2ATR, although the number of shares increases, the total amount of the loss remains unchanged because the actual stop loss percentage of the ATR corresponds to a small amount, according to 1% = 1ATR, the stop loss is 2% of the total capital. But if the direction is upward, the back portion of the position can bring additional returns to the investor, further strengthening the profitability of the holding.