Education & Trading Resources

Average True Range (ATR)

The True Range indicator is recognised by three key factors:

  • Current high less the current low
  • The absolute value of the current high less the previous close
  • The absolute value of the current low less the previous close

The Average True Range is a moving average of the True Ranges – the True Range is plotted for at least 14 days to obtain the Average True Range.

For example, a change in ATR value from 2 to 3 for a $15 stock represents a move of Price/ATR from 13% to 20%. A change in ATR value from 2 to 3 on a $50 stock represents a move of Price/ATR from 4% to 6%.

Divergence

Divergence is represented as either positive or negative, and in both cases indicate an immanent shift in the price in an upward or downward trend. Positive divergence will happen when the price of a stock creates a new low while the indicator commences an upward move. Negative divergence can be seen when the price of the stock creates a new high, but the indicator does not follow and instead closes lower than the previous high.

Historical Volatility (HV)

There are two types of volatility present in the stock market: one is implied volatility and the other is historical volatility. Historical volatility is calculated by using historical or previous stock prices and is calculated by using the standard deviation of a stock’s price changes from the close of trading for a specified number of days.

Usually when a stock trades within a wide range (there is a large difference between the opening and closing prices of the stock over a given period), its historical volatility will increase. On the other hand, there are periods of time when stocks move sideways and show low levels of historical volatility. Basically historical volatility can be used to measure whether a stock has been trading quietly and in a narrow range or erratically with large price swings.

Even though historical volatility measures past prices, it provides little if any information about what will transpire in the future.

Neckline

The neckline can be used as a support or resistance level and can be found on a head and shoulders pattern. Traders use this to determine strategic areas to place orders.

Each peak of a regular head and shoulders pattern falls toward a neckline, before it rises to create the next peak. A move below the neckline is used by traders as a signal of a reversal of the current upward trend.

A move below the neckline of a regular head and shoulders pattern is always used as a signal of a move lower. In the case of an inverse head and shoulders, the neckline is found as a level of resistance that has prevented the price from heading higher. A move beyond the neckline in this case would be used to signal the start of an upward trend.

Tirone Levels

You will note three parallel horizontal lines used to show potential support and resistance for the price of an asset. The dotted centre line has been created by calculating the difference between the highest high and the lowest low for the asset price over a given amount of time and dividing it in half. The top and bottom line are drawn 1/3 and 2/3 of the difference, respectively, between the same high and low that are used to calculate the centre line.