On Average True Range (ATR)

The average true range (ATR) is a measurement of volatility based on price action moving beyond a defined average (the default is 14 periods and what I’m using for now). In a sense, the ATR is telling us that something is afoot about the stock/sector/etf/market. I recently started tracking the intraday movement of the ATR for each component in the S&P 500 out of curiosity. I calculate the ATR two different ways; one based off the opening price and the other from the prior day’s close. Here’s a few uses of this data that I see fitting into my market participation.

Intraday:

  • Fading a stock that is approaching intraday support/resistance with an extended ATR. Support/resistance could be in the form of pivots, price, fibonacci and RSI to name a few.

Swing:

  • Could sell put spreads against a stock that has extended its ATR and is approaching significant support (the inverse is true on the call side/resistance). I prefer to use the weekly pivots (either traditional or Woodie) as significant levels. I see this working well with weekly options and using RSI(2) as a confirmation of a pending pause or pullback.

Sentiment:

  • Tracking the percentage of SPX components exceeding their ATR to gauge accumulation/distribution days.
  •  A gauge for underlying strength, like breadth, of overall market moves.
  • Can quickly see leaders/laggards in sectors by sorting via ATR

Overall:

  • Compare the Beta of the stock to it’s ATR to assess potential for continuation in direction thus expanding the range (volatility).
  • Could be helpful in gauging implied volatility in option chains to see if it’s increasing as ATR is expanded.

I believe one of the first things to do is determine what the catalyst was for the expansion in the ATR. Find out whether it was specific to the stock (upgrade, downgrade, earnings, etc.) or a market wide move. Then, according to the way you participate in the market, craft a strategy around it all the while managing risk. I’ve just started watching this data and I’m excited about the potential opportunities. There are no doubt tons of other ideas/uses for this data so I’d love to hear any that you have in the comments section below.