The ATR Advantage

Which is better a high average true range (ATR) or a low one? The answer - it depends on the circumstances. If you are going to day trade and you have two stocks where everything else is equal and you only want to be involved with one of them for whatever reason - pick the one with the highest ATR on the minute-basis you are playing (ATR varies with time scale). You do this because you want the most "bang" for the buck and ATR is a proxy for volatility.

But if you are planning a swing trade and you are faced with several different stocks and can't choose between them then the answer is clear - take the stock with the lowest ATR.

Here are the results of testing done with the ATR set at various levels -


Obviousely the lowest ATR has both a better win percentage and ROI. And you can't help but notice that the ROI deteriorates as the starting ATR increases.

Once more this is a volatility issue - before a stock can go up it has to stop and the ATR tells you when a stock is slowing down or "stopping".

One other thing you have to remember is that ATR is also relative to the price of the stock - that is - low priced stocks have naturally low priced ATR and high priced stocks have naturally high priced ATR. So you really can't use ATR across price boundaries.

Remember also - ATR is a guide not a guarantee - trading stocks is a risky business.