It was a “ho hum” day in terms of price action as the FOMC interest rate decision compelled traders to wait on the sidelines until the announcement, and once 2:15 pm ET hit, there wasn’t much to get excited about either. So, with the market not giving much in solid volatility today, I decided to share how I use the ATR in my day trading framework.
What is the Daily Average True Range?
The average true range is one way to measure the volatility of a given market. Basically, it measures the average range of movement an asset or market will move based on its past movement. For more info, check out our Forexpedia page on the ATR.
I don’t have hard numbers on this yet, but I feel that days with market moving, volatility spiking events occur much less often than days without them; and on those eventless days, the markets tend to behave in a range bound manner. It is during these times I like to watch the “extreme” of that behavior for the markets to find a top or bottom and return to the median. Or if the pair is in a trend, I’ll look at them for potential support or resistance to jump back into the trend.
Also, I feel there has to be a ton of computerized trading systems out there that take volatility into consideration, where enough orders are placed at the top and bottom of the ranges to influence price action even a little bit. Again, I don’t have hard numbers on the stats, but I’ve made hundreds of charts marking those levels to know they do work often on days without major news events.
How to Calculate the top and bottom DATR levels?
It’s basic math, and the hard part, calculating the ATR, will be done by your charting software.
To get the daily average true range, apply the ATR indicator on the daily time frame. I use the setting of “20” which means it looks back at the market data over the past 20 periods; in this case, the daily timeframe. I use 20 because it represents price action over the past month. I haven’t played around any other settings yet, but I find it works well.
After you get the daily ATR, or DATR as I like to call it, the rest of the math is cake from there.
Top DATR = Day Open price (4pm ET) + (DATR/2)
Bottom DATR = Day Open price (4pm ET) – (DATR/2)
Check out my chart example below:
Pretty simple, right?
What to Know about using DATR
Out of all the inflection levels described in my day trading framework, the DATR is probably the level I feel has the least influence. It is a mathematically calculated level and not created by recent market behavior. This means that there may have not been a prior instance recently where that area showed market influence like a previous week/day high or low, major or minor round numbers, week/day opening price, etc. It just won’t have the same market influence as these levels.
But again, I’ve plotted that bad boy enough times to know that while it won’t always be an influence, it’ll happen enough times to give you a slight edge in picking out entry/exit levels on non-major event days. And we all should take a better edge where ever we can get it, right?