Fri 14 Mar 2008
Comparing Apples with Apples: ATR
Posted by ray under Written Plan
A quick one folks. I have to fly to Hong Kong first thing tomorrow so and I still have a million-and- one things to do.
Tonight, I’ll answer the questions raised about ‘what period ATR to identify mean ranges’. The key principle is to ensure I am comparing similar populations - similar in structure volatility. Figure 1 will best explain what I do.
FIGURE 1 13-w AUDUSD
Let’s assume I want to assess the current ATR of the AUDUSD and I am trading the 18-day timeframe (monthly trend), I first place the 250-day and 60-day Hart swings on a daily chart. The two approximate the 12-month and 13-week Barros Swings. The moment we place the swings on the chart, we see that there are two clear divisions of volatility. The period commencing 07/25/07 marks the beginning of some large and choppy 13-w swings. Prior to that (from the 250-day low), the swings were gentler and corrections shallower.
Next, I place a Market-Analyst Probability Box on the entire period from 03/09/06 to 02/29/28. The blue Prob Box shows we had an ATR of 81.2 with a standard deviation of 46. The Red Prob Box shows the earlier period had an ATR of 63.4 and a standard deviation of 24.4. Finally, I place a green Prob Box to confirm the current stats: the green box shows the ATR has increased to about 120 with a standard deviation of about 60.
I want to fine down the ATR farther. Normally, I like to see at least 30 bars in the swing; in this case, we only have 28 for the last swing, but it will do as an illustration. Figure 2 shows that the ATR has dropped marginally in the last swing structure. This issues a warning that the market will move into congestion. So I’ll be watching the Primary Sell Zone of 949o to 8412.
FIGURE 2 13-w AUDUSD
Note that the above is not a full analysis of the AUDUSD; but it does serve to show how I measure the ATR and to what uses I put it.
March 15th, 2008 at 12:15 am
Ray
While on the topic of ATR, yesterday’s breaking news on Bear Sterns would have triggered some spikes, which will give an unusual reading for ATR.
The market is cracking based off Bear Stearns, a major investment bank that has lost nearly 50% of its value .
We saw a “sell first, ask questions later” reaction in nearly all equities,but with Gold hitting the sky while Crude did not move as much.
It will be the tail that wags the dog, as they say.
Be wary of new positions, as volatility can hurt as the news is being digested.
March 17th, 2008 at 12:25 am
PS cross ref : Afraid to Trade:
1. anatrader
Corey
Thank you for showing the correlations of the twin evils of Gold and Crude and the inverse relationship with USD.
I have been able to trade quite well with the twin evils lately.
Comment :: March 15, 2008 @ 17:02 pm
2. Corey Rosenbloom
Ana,
I love it! I’ve never classified these as the ‘twin evils’ but it’s a new thought!
This has been a relatively predictable and stable relationship and likely will be for some time into the future. Congrats on being profitable through trading them!
Comment :: March 16, 2008 @ 29:51 am