Average True Range Percentage (ATRP) - Strategy And Rules

Average True Range Percentage (ATRP) – Strategy And Rules

Sometimes, you may want to compare the volatility in different financial securities but that may not be possible with absolute-value-based volatility indicators like the ATR — this is where the Average True Range Percentage (ATRP) comes in. What do you know about this indicator?

The Average True Range Percent (ATRP) is a percentage-based volatility indicator that can be used to compare the volatility in different financial markets or assets with different prices. It is a variant of the ATR (Average True Range) indicator that estimates the volatility of an asset by measuring its ATR as a percentage of its most recent closing price.

In this post, we will look at most of the questions you may have about this ATRP indicator: what it is, how it works, and how you can improve your trading strategies with it. Read on!

Key takeaways

  • The Average True Range Percent (ATRP) is a percentage-based volatility indicator.
  • It helps compare volatility across different financial markets or assets with varying prices.
  • ATRP is a variant of the ATR (Average True Range) indicator, but expresses volatility as a percentage of the asset’s closing price.
  • The ATRP is calculated by dividing the ATR by the asset’s closing price, then multiplying the result by 100.
  • Key benefit: Since the ATRP is a percentage, it allows for easy comparison of volatility between assets with different price levels.
  • Traders use ATRP to measure volatility and assist in asset rotation and portfolio management.
  • More top trading indicators if you click here.

What is the Average True Range Percentage (ATRP)?

The Average True Range Percent (ATRP) is a percentage-based volatility indicator that can be used to compare the volatility in different financial markets or assets with different prices. It is a variant of the ATR (Average True Range) indicator that estimates the volatility of an asset by measuring its ATR as a percentage of its most recent closing price.

Similar to the ATR indicator, it measures the average of the true ranges over a given period, but rather than use the absolute value, it expresses it as a percentage of a bar’s closing price. The ATRP is obtained by dividing the ATR by the asset’s closing price and then multiplying the result by 100.

Because its value is a percentage of the asset’s price, the ATRP is not only used to measure volatility in an asset, but also, it can be used to compare the volatility in different assets that are trading at different prices. Traders use it for both, especially for the latter where it can help in asset rotation and portfolio management.

Average True Range Percentage (ATRP)

Average True Range Percentage (ATRP) trading strategy – rules, settings, and returns

Let’s backtest a trading strategy that has the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

(Please look at the code below if you are unsure of the trading rules.)

This is the equity curve for the S&P 500 (SPY) from its inception until today, including 0.03% commissions for each trade (0.06% for a round trip):

Average True Range Percentage strategy
Average True Range Percentage strategy

Trading performance metrics and statistics from inception until today (including 0.03% commissions per trade):

  • Number of trades: 285
  • Average gain per trade: 0.3%
  • Annual returns: 2.4%
  • Win rate: 50%
  • Time spent in the market: 36%
  • Risk-adjusted return: 6.6%
  • Max drawdown: 15%

This is the code we used for the backtest (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

How does the ATRP indicator work?

The ATRP indicator works as a volatility indicator, just like the ATR indicator. However, the ATRP shows changes in volatility relative to the instrument’s price by measuring the ATR as a percentage of the bar’s closing price. This allows it to be used to compare the volatility in assets with different prices, unlike the ATR, which measures the absolute level of volatility rather than as a percentage.

The problem with measuring the absolute value of volatility with the ATR is that stocks with lower prices tend to have lower ATR values than higher-priced stocks. So, when comparing two stocks, one could erroneously think that the lower-priced stock has a lower volatility than the higher-priced one.

Since the ATRP measures the ATR as a percentage of an asset’s price, the ATRP allows for the volatility of assets to be compared, irrespective of their price levels. A high ATRP value indicates high volatility, while a lower value indicates lower volatility relative to the price. With the ATRP, you can see a lower-priced stock with higher volatility than higher-priced stocks, and it becomes easy to pick stocks with the volatility that suits your risk appetite and trading strategy.

Why is ATRP useful in trading strategies?

The ATRP is useful in trading strategies because it allows traders to compare the volatility of different securities, irrespective of their price levels. This is possible because it measures the ATR as a percentage of an asset’s price rather than giving an absolute value.

The indicator enables traders to select stocks with the right volatility that suits their risk appetites and trading strategies. For instance, if a risk-seeking trader wants to pick a lowly-priced stock with high volatility for day trading, they can do so without running the risk of thinking that lower-priced stocks have low volatility. And, if a conservative investor wants to pick some blue-chip stocks with low volatility for long-term investing, they can do as well without running the risk of considering higher-priced stocks too volatile.

How is the ATRP different from the ATR?

The ATRP is different from ATR in that it measures volatility as a percentage of the asset’s price, whereas the ATR measures the absolute value of the volatility. In fact, the ATRP uses the ATR in its calculation — it simply expresses the ATR as a percentage of the bar’s close price by dividing the former by the latter and multiplying the result by 100. Since the ATRP measures volatility as a percentage of an asset’s price, it allows traders to compare the volatility of different assets, regardless of their price levels, unlike the ATR which measures the absolute value of volatility.

How is the Average True Range Percentage (ATRP) calculated?

The Average True Range Percentage (ATRP) is calculated using the following formula:

ATRP = [ATR / Close]x 100

Where:

Close = the most recent closing price

ATR = Average True Range, which is given as follows:

ATR = (Sum of TRi over N periods)/N

Where:

N = the number of periods

TRi = individual True Range for each period, which is given as follows:

TRi = The largest of (H — L) or Abs(H — Cp) or Abs(L — Cp)

Where:

H = Index period’s high

L = Index period’s low

Cp = Preceding period’s close

Abs = Absolute value of

What are the key components of the ATRP formula?

The key components of the ATRP formula are as follows:

  • The ATR: This is the average true range of an asset over a given period. It is measured by summing the individual true ranges over the given period. A true range for any index period is the largest of the absolute price distance between the index period’s high and low, the index period’s high and the preceding period’s close, or the index period’s low and the preceding period’s low.
  • The Close: This is the current closing price. It is used to divide the ATR, and the result is multiplied by 100 to get a percentage value for the ATRP.

How does ATRP help measure market volatility?

The ATRP helps measure market volatility expressing the ATR as a percentage of the asset’s most recent closing price. In other words, the ATRP is calculated by dividing an asset’s ATR by its closing price and then multiplying the result by 100 to get a percentage value.

So, the indicator is similar to the ATR indicator, but rather than use the absolute ATR value, it expresses it as a percentage of the asset’s closing price. Since the value is in percent, the ATRP is not only used to measure the volatility of an asset but also to compare the volatility of different assets, notwithstanding their different prices.

When should you use the ATRP indicator?

You should use the ATRP indicator when you want to measure the volatility of an asset, just as you would use the ATR indicator. However, the ATRP becomes indispensable when you want to compare the volatility in different securities to know the one that suits your risk appetite.

For example, you may want to trade an instrument with low volatility relative to its price. You can use the ATRP to compare related instruments and then choose the one with the least volatility or the level of volatility you want. The indicator allows you to do that because it measures volatility as a percentage of the security’s price, rather than give an absolute value.

What is a good ATRP value for different markets?

What constitutes a good ATRP value for different markets may depend on a trader’s preference and the timeframe. The volatility level that may be considered good on the daily timeframe would be too small for the monthly or yearly timeframe. In a day, a 1-5% ATRP may be considered good enough in most markets. But in the monthly timeframe, that may be insignificant to many traders.

Some traders, especially active day traders, like markets with higher volatility like the crypto market and penny stocks, while others like blue-chip stocks with lower volatility.

How can ATRP help identify trading opportunities?

While it may not show entry setups on its own, the ATRP can help identify trading opportunities when combined with other indicators or other forms of technical analysis. For instance, you can combine the ATRP with moving averages, volume indicators, and price action analysis to trade a breakout from a triangle chart pattern.

When the price is consolidating in a triangle pattern, the volatility (ATRP value) gets smaller and smaller. Then, when the breakout occurs, there’s a surge in volatility, which can be confirmed by the ATRP value. The moving averages, volume indicators, and price action analysis help you to identify the trend and confirm the breakout.

How does ATRP assist with risk management?

The ATRP can assist with risk management by telling you the extent of volatility in the market, which can guide how you set your stop-loss and take-profit levels. For example, you can set your stop-loss order at 1-2 ATRP and profit target at 2-3x the stop-loss size.

This is better than setting them arbitrarily as it considers the market volatility — the stop loss becomes wider in a high-volatility environment and narrower in a low-volatility market.

Also, the ATRP indirectly affects the position size. For example, let’s say you have a risk management plan to only risk 1% of your account size per trade. When the volatility is high and your ATRP-based stop loss becomes wider, it forces you to trade a smaller position size. Conversely, when volatility is low and your ATRP-based stop loss becomes tighter, your position size becomes correspondingly bigger.

Can ATRP be combined with other indicators?

Yes, the ATRP can be combined with other indicators. In fact, that’s the right way to use the indicator in a trading strategy. Some of the indicators you can use to formulate a strategy with the ATRP include moving averages, momentum oscillators, and volume indicators.

For example, you can use the ATRP to find stocks with the right volatility for your day trading and use a moving average to find the direction of the trend. Then, you use a volume indicator to confirm a breakout in the direction of the trend or use a momentum oscillator to spot the end of a pullback so you trade the next impulse swing in the trend direction.

What are the advantages of using ATRP in trading?

The advantages of using ATRP in trading include:

  • it can be used to measure the volatility of an asset
  • it is specifically used for comparing the volatility of different markets or assets regardless of their price levels
  • it is very useful for implementing a volatility-focused risk management plan
  • it can be combined with other indicators to create a trading strategy

How does ATRP respond to price movements?

The ATRP responds to price movements the same way the ordinary ATR does. Its value rises when price movements are wide, indicating rising volatility in the market. When price movements are small, the indicator’s value falls, showing that the market volatility is low.

However, the indicator does not show the direction of the price movements and also does not tell you whether the market is trending or range-bound. This is why you have to combine it with other indicators that can show such.

What are common settings for ATRP in different markets?

The common settings for ATRP in different markets are usually 14 periods with a 20-period SMA for smoothening. However, it is up to the traders to determine the settings that are optimal for their trading styles and the specific markets.

They will have to backtest their strategies and experiment with different settings to find out the ones that offer the best results.

How can ATRP be applied to short-term trading?

The ATRP can be applied to short-term trading by using it on lower timeframes that are suitable for such a trading style. Short-term trading is about the same as day trading and swing trading. To use the ATRP for day trading, you have to apply your ATRP-based strategy on any of the intraday timeframes for day trading, such as the hourly, 30-minute, or 15-minute timeframe.

If you are a swing trader, you can apply the indicator on the 4-hourly or daily timeframe — whichever offers your strategy the best outcome.

Can ATRP be used for long-term trading strategies?

Yes, the ATRP can be used for long-term trading strategies if applied on the suitable timeframes for long-term trading. Also known as position trading, long-term traders leave their trades in the market for several months and years, which is why they often trade on the highest timeframes, such as the monthly and weekly timeframes.

If used on these timeframes, the ATRP can be used for long-term trading strategies.

How does ATRP affect stop-loss placement?

The ATRP affects stop-loss placement by showing the extent of volatility in the market, which can guide traders on how to set their stop-loss placement. Some day traders set their stop-loss orders at 1-2 ATRP and their profit target at 2-3x the stop-loss size.

This way, they are using the level of volatility in the market to determine their stop-loss level, rather than setting it arbitrarily. As a result, their stop loss will be wider when the market volatility is high and tighter when the market volatility is low.

What are the limitations of using ATRP?

The limitations of using ATRP include:

  • It cannot identify the direction of price movements, let alone the trend direction.
  • It cannot be used as an entry setup
  • It cannot be used to create a trading strategy on its own without combining it with other indicators that can show the trend and entry setups
  • Even though it can be used to guide stop-loss placement, it does not guarantee that the stop-loss order won’t be hit

How can ATRP be adjusted for different asset classes?

To adjust the ATR for different asset classes, you have to study the various asset classes to know how they move and then create strategies that are tailored to them. You will have to backtest the strategies, experimenting with different ATRP settings until you find the setting that suits each asset class.

Also, while trading, you will have to regularly evaluate the result of your trading in each asset class so you know when you need to tweak your ATRP a bit to suit the prevailing conditions in each market.

Is ATRP suitable for all trading styles?

Yes, the ATRP is suitable for all trading styles if used with the right strategy and on the right timeframe. A day trader can use it on any of the intraday timeframes for day trading, such as the hourly, 30-minute, or 15-minute timeframe, and it will perform well if the strategy is good.

On the other hand, a swing trader can use it on the 4-hourly or daily timeframe, and it will perform great too if the strategy is right.

What is the historical significance of ATRP in trading?

The historical significance of ATRP in trading is that it enables traders to compare the current market volatility with the historical volatility of the market.

It can be calculated for a time in the past and compared with the value at the present moment to see the evolution of market volatility over the years.

How can traders interpret changes in ATRP values?

To interpret changes in ATRP values, traders have to consider the direction and the size of the changes. Are the values of the ATRP getting lower or increasing, and by how much?

If the values are falling, it means market volatility is reducing, and if the values are rising, it means the market volatility is increasing. All these have to be judged in the light of the price action.

What are examples of successful trading strategies using ATRP?

These are a few examples of successful trading strategies using ATRP:

Example 1: A long position with stochastic divergence

Average True Range Percentage strategy
Average True Range Percentage strategy

In the AMD daily chart above, you can see an up-trending market, as shown by the blue trendline. When the market pulled back to the trendline, it bounced off. Meanwhile the stochastic gave a bullish divergence signal in support of a buy entry. The ATRP value at the entry was about 4%. Using a stop-loss of 1.5 ATRP, we projected our TP to 6 ATRP, giving us a risk-reward ratio of 4.

Example 2: A short position with stochastic divergence

Average True Range Percentage settings
Average True Range Percentage settings

In the chart above, the market was in a downtrend, as shown by the blue downward trendline. The stochastic gave a hidden bearish divergence when the price rallied to the trendline and reversed. Using the ATRP for the stop, a stop loss set at 1.5 ATRP would have given a profitable trade with a risk-reward ratio of 3.

How can beginners start using ATRP in their trading?

Beginners can start using ATRP in their trading by first learning how the indicator works and what they can do with it, such as setting their stop-loss and profit target levels. Next, they should open a demo account and practice until they get used to trading with the indicator.

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