Large numbers of investors have experienced abnormal levels of investment performance volatility during various periods of the market cycle. While volatility may be greater than anticipated during certain periods of time, a case can also be made that the manner in which volatility is typically measured contributes to the problem of unexpected volatility. Objective of this article is to discuss the issues associated with the traditional measure of volatility, and to explain a more intuitive approach that can be used by investors in order to help them evaluate the magnitude of their investment risks.
As we all are aware of the risk involved in trading the stocks and commodities, so we have found certain strategies and tools to overcome these risks. Trading involves a lot of risk as the buying and selling of stocks must take place at the right time. Therefore, in order to earn profit from stocks, traders need to apply two or more technical indicators simultaneously to obtain accurate trading tips. There are many technical indicators, which performs well when combined with the other technical index or oscillator. Technical indicators help the technical analysts to find the best buying and selling signals.
One of the frequently used indicators by the technical analysts is Normalized average True Range that is used to measure the volatility of the underlying assets. J.Welles Wilder invented normalized average true range. This indicator aims at normalizing the average true range values. Many advisory firms use this indicator along with volume and retrieve the best buying and selling signals as the indicator measures volatility of the stocks. There is certain formula used in the index to calculate the average true range. It is shown below:
NATR = ATR(n) / Close * 100
Here, ATR is average true range and it is calculated as follows.
ATR = 1/n [ i=1nTRi ]
The Average True Range indicator calculates the higher ATR for high level of volatile stock or commodity and the lower ATR for low level of volatile stock or commodity. The Average true range indicator is calculated to hold also the missing volatility. However, the technical analysts are aware of that the ATR indicator just indicates the volatility of the stocks not the price direction. Very few of us are aware that the average true range indicator was designed only to calculate the volatility of the commodities but technical analysts find this useful for both stocks and commodities.
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