The phrase “Average True Range” often floats around in financial circles, but what does it truly entail? Whether you are a novice investor or an adept trader, understanding the concept of Average True Range (ATR) can be a valuable addition to your investment analysis.
Primarily, the Average True Range (ATR) is a volatility indicator that illustrates the degree of price volatility within a particular timeframe. It is a commonly used tool in the technical analysis of the financial market, which aids traders in forecasting potential market movements and thus, making informed trading decisions. Additionally, ATR assists in determining stop loss levels or potential profit targets. Developed by a popular market technician, J. Welles Wilder, ATR has now become an integral part of many trading strategies.
On the secondary front, it’s crucial to note another term – enterprise value meaning. Considered as one of the critical indicators of a company’s total value, the ‘enterprise value’ offers an accurate measure of a business’s total market value. It encompasses the entire market capitalization, short and long-term debts, and excludes any cash and cash equivalents. The computation of enterprise value provides a more comprehensive view of the company’s financial health, which directly correlates with ATR, influencing the volatility and decision-making of investors.
See also: Open Demat Account
The formula to calculate the Average True Range (ATR) is derived from the True Range, a concept that Wilder introduced. The True Range considers the values of the current high less the current low, the absolute value of the current high less the previous close, and the absolute value of the current low less the previous close. To determine ATR, you will average the True Range over a predetermined period, typically 14 periods.
ATR = [(Prior ATR X 13) + Current TR] / 14
To illustrate with INR, Suppose a stock opened at ₹1000, made a high at ₹1025 and closed at ₹1010 on Day one. On day two, this stock opened at ₹1015, made a high at ₹1030, and closed at ₹1020. The ATR for these two trading days can be calculated as follows:
– The True Range on Day one = High (₹1025) – Low (₹1000) = ₹25
– The True Range on Day two = High (₹1030) – Close of Day one (₹1010) = ₹20
– ATR = [(₹25 X 13) + ₹20] / 14 = ₹24.4
While ATR provides an insight into the volatility of the market, it is essentially neutral and does not provide any indication of the price direction. Therefore, when an asset’s ATR is high, it implies that the trading ranges are wide, and when an asset’s ATR is low, it suggests that the trading ranges are narrow.
In a nutshell, the Average True Range is a robust technical tool used by traders to understand market volatility and make informed trading decisions, while the Enterprise Value reflects the overall worth of a company. Combining these indicators can deliver comprehensive insights into an asset’s actual value and its market behaviors.
See also: Open Trading Account
However, it is essential to add a disclaimer here. Investing in the Indian Stock Market comes with its own set of risks and rewards. An investor must thoroughly evaluate all the pros and cons related to it. One should take into account the ATR and enterprise value but they are by no means the only metrics to guide your investment decisions. They should only be used as part of a larger, comprehensive strategy and not used in isolation.
To conclude, the realm of trading is much like a seascape – dynamic, vast, and at times, unpredictable. As one navigates through its tides, the Average True Range serves as a reliable compass, guiding traders away from potential storms and into the calm waters of successful trading. Nonetheless, no single indicator guarantees success; one must leverage a combination of various strategies and indicators, such as enterprise value and ATR, to succeed in the market.
