As per the above chart, The Average True Range (ATR) of 84.55 on a 30-minute Bank Nifty chart with a 14-period setting provides information about the market’s recent volatility but doesn’t predict specific price movements.
An ATR of 84.55 suggests that recently, the price of Bank Nifty has been fluctuating within an 84.55-point range on average per 30-minute period. So, While the ATR doesn’t predict future price movements, traders often use it to gauge the potential range for the day. If the market conditions remain similar to the recent past, you might expect similar levels of volatility. However, this is not a prediction; it’s more about setting expectations based on recent market behavior.
Of course, the volatility of an asset can rise and fall. It is important to remember that the ATR indicator does not show you which way price is moving.
To use the ATR for stop loss placement, you should look at the indicator’s reading when you enter your trade, then place your stop loss an equal amount of pips from your entry. For example, if as you enter a long trade the ATR reads 100 points, you should place your stop loss 100 points below your entry.
Again, the reverse is true for a short trade.
Using ATR in this way for stop loss placement allows you to avoid any market noise.
You can change the setting of the ATR indicator, but it is important to remember that doing so will affect its sensitivity. As an example, imagine your ATR is set at 14. If you change the setting to 10, this will reduce the amount of periods on which the indicator bases its calculation.
This will make it more sensitive to price movements and produce a choppier ATR reading.
Let’s clarify how the Average True Range (ATR) can be accurately used for setting stop losses and targets, especially in the context of an instrument like Bank Nifty where the current ATR is 84:
Using ATR for Stop Loss:
Using ATR for Profit Targets:
So, while the ATR provides a guideline based on past volatility, it’s essential to use this tool as part of a broader, well-considered trading strategy.