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Masters Class: Average True Range (ATR)

2019-3-1 23:27 | By : MEX Analyst Team

The three most important things to invest in: return, risk, liquidity, and today's protagonist is risk.

Often talk about risk, but in addition to the "high" risk and "low" risk, how to capture the concept of risk in a more scientific way? Although the concepts of "standard deviation" and "variance" have been mentioned in other articles, they may be too abstract, so today we will use the ATR, a technical indicator that we often come into contact with to explore the scientific concept of risk.

How do I calculate ATR?

ATR is made up of Wells Wilde. This technical indicator refers to the average of true range in N days

True range refers to the highest of the three: current high minus the current low, the absolute value of today high minus yesterday's closing price, the absolute value of today low and yesterday's closing price. ATR is basically the moving average of N days.

ATR indicates that the trader's expectations and enthusiasm on a currency pair. A large or increased ATR indicates that the trader may be prepared to continue buying or selling shares on the same day. The decline in volatility means that traders do not have much interest in the market.

Application of ATR

Below, I will use the big data of the past ten years in the average of 14 days, and comparing the major USD currency pairs, simulating the situation of investors when deciding on risk.

As can be seen from the above, the dollar is the most volatile against the Russian Ruble, the South African Rand, the Norwegian Krone, and the Swedish Krona, while the other major currencies pairs are less volatile. Here we can get two revelations: First, in term of risk, the unpopular dollar pairs are the most risky, while the major dollar pairs are lower. Second, high volatility represents the greater the profit margin, so the unpopular dollar pairs have the highest rate of return, while the major dollar pairs are relatively low in return.

Therefore, when investing, investors should first measure their own risk tolerance, and we do not recommend the pursuit of high returns and the blindly pursuit high-risk currency pairs. In addition to the risk of price movements in the investment, there is also a risk that is often overlooked: Counterparty risk. In the 08 Financial Tsunami, Lehman's investors ignored the risk of the collapse of Lehman Brothers, and so they need to bear the complete loss.

We, the Multibank Group is subject to the most stringent regulations, and we has a sound financial situation and a reliable trading system. We are worthy of your trust in the investment platform. See you next time!

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