Posted by forex at 5:17 AM
Read our previous post
Computing the Average True Range
1. Create rows of data in chronological order. Create a separate column for the opening stock price, the high price, low price and closing price. Ignore any volume statistics. Create data rows for as far back as you wish to compute average true range.
2. Look for the greatest difference between the previous day's close and the current day's high, low, open and closing prices. Enter the result in a new column for the present day. Enter the result as an absolute number, ignoring a positive or negative change.
3. Compare the largest difference between any two of the five data points. For example, if yesterday's close was 7 and the next day the high was 7.25, the low was 6, the open was 6.5 and the close was 7 the absolute change to be entered was 1.25.
4. Use the average true range as a moving average. Most traders use a 20 period moving average. Moving averages requires the trader to drop the oldest period data and replace it with the current day's data. Experiment with average true ranges for long term and day trading purposes. Increasing average true range trends indicate bullish momentum.
5. Use the average true range to separate the difference between a normal fluctuation and a change in trend. For example, if the average true range is 1 point and a stock price rises 2 points, the rise may be more than normal fluctuation and bears further investigation. When buying a stock, create stop losses below the average true range to avoid whipsaws for normal volatility.