Average True Range Definition: Day Trading Terminology
The Average True Range is a trading term used to the measure the volatility of a stock or index. It’s a technical indicator that tells us the average price range a stock typically trades in and was first introduced by Welles Wilder. It calculates the average price range over a given period time, usually for the past 14 days, and is displayed as either a number of in a graph at the bottom of your charting software. The higher the Average True Range the more that stock moves on a daily basis while a stock with a low Average True Range doesn’t move as much.
Active traders like stocks with a high ATR because it gives them more opportunity to make money than a stock that doesn’t move much. For instance, Netflix ($NFLX) has an ATR of $3 while a stock like Bank Of America (BAC) only has an ATR of $0.55. There is much more potential to make money in NFLX than BAC, but it also carries higher risk. Most day traders like to see a stock with a $1 minimum Average True Range as it provides more range to profit from.
The Average True Range is a useful tool for traders. It helps you determine whether a stock is a good candidate for day trading and it can also be used for entry and exit points. Knowing what stocks give you the best opportunity to make money is important in your stock selection process. The ATR is a good place to start when looking for big moving stocks and is also something you could add to your scanners if you have live scanning software.
Warrior Trading Pro Tip
When scanning for stocks to trade it’s a good idea to check out its Average True Range over the past few weeks to get an idea how much the stock moves and if it’s worth adding to your watch list. Granted some stocks with fresh news will have a much higher range than normal but it’s still important to understand how the stock trades and how much it can potentially move.