# How Does ATR Work in Crypto Trading?

By  //  April 21, 2022

ATR stands for Average True Range. It’s a technical indicator that is used in financial markets. The ATR is calculated by taking the difference between the highest and lowest traded price then dividing that by the number of trades it took to get there (expressed as a ratio). It’s basically how much volatility happened in that timeframe.

What is ATR is a question that’s often asked in sections of the crypto trading community. ATR can be used to gauge whether or not it’s an excellent time to buy, sell, or hold an investment position. Traders use ATR to see if crypto has been overbought or oversold in the markets. This can help show when it’s a good time to buy or sell. They also use ATR to determine what price they should buy or sell.

A Simple Example of ATR

Let’s look at an example of how ATR works. Let’s say it’s March, and the Crypto Bull Market is roaring. At the moment, a \$5 coin is trading at \$650. Today, the market moves up to around \$750.

The ATR is calculated by taking the difference between the highest and lowest traded price then dividing that by the number of trades it took to get there (expressed as a ratio). The result is 2.63 (the increase in price:\$5-\$650/2=2.63).

This means that the market made 2.63 times as much, or \$2.63, as it lost (\$650-\$550/2.63=\$650/\$550=\$650).

So what happened? The market went up 2.63 times as much as it dropped. This means the market is now at its highest.

Now that we’ve seen a simple example let’s see what happens when the ATR starts to get out of whack. Let’s say the ATR goes from 2.63 to 4.0 in one day. This means that the market dipped significantly, going from \$650 to \$550 within a short period (like an hour). Then it quickly bounced back to \$650.

This means that the market made \$2.63 of gains and 4.0 times as much as it lost (\$550-\$550/4=\$550).

So what happened? The market went up 4.0 times as much as it dropped. This trend continues day after day. This is a good sign that the ATR has become too large, and the market might be overbought or oversold.

What Does an ATR of 2 Mean?

This means that the market is under-bought (an excellent time to buy). It also means that the market has slowed down and is returning to its normal pace of volatility. You should also note that an ATR of 1.5 indicates a slightly oversold market, while 2.5 or greater indicates a significantly oversold market.

However, these values are different for every crypto or the market. For example, a coin with a high ATR (above 2.5) can be considered overbought, while an ATR below two can be considered oversold. This is because their ATRs fluctuate more than other coins.

When to use it?

Crypto traders use ATR as an indicator of volatility when determining if they should buy, sell or hold on to their investment positions.

As an indicator, ATR is a good way to determine how oversold or overbought the market is. When the market is overbought, it shows signs of a possible crash. If you see an ATR that’s rising quickly and rapidly (along with continued volume), then this might be a good time to sell before the crash.

On the other hand, if you see the ATR beginning to go down and turning negative, this might be a good time to buy-in.

The ATR is also an excellent way to determine support levels. When the market is oversold, it could be a good time to buy. This is because the market might bounce back up or start to find support at the bottom of its range (the lowest price it fell).

When this happens, you should see an ATR that has been consistently falling and increased volume. This can indicate that the market is about to bounce back up towards its original point.

Prolonged volatility (referred to as a bear market) is another indicator of a sign of overbought/oversold.

For traders, using ATR is also an excellent way to determine when a trade should end. In other words, if you see the ATR going into negative territory after holding your coins for some time, then this is usually a signal that the market might be in trouble, and you should probably sell your position.

The advantage of using ATR is that it teaches you to buy low and sell high. By using it as a trading indicator, you’d be able to time your buys and sells at the perfect time.

Another advantage of using ATR is that it helps you determine the peak price (the highest point) and the bottom price (the lowest point). This gives you an idea of where to look for support and resistance levels.

However, ATR doesn’t tell you what the price will be at any given time. You should use this indicator in conjunction with other indicators to help your decision-making.

Also, you could use ATR as a signal that tells you how overbought or oversold the market is (relative to its average). By looking at the ATR of a market and comparing its value to where it was before, you can determine whether or not it’s overbought/oversold.

When the market is overbought, you can determine how long it might take to correct itself. However, if the market starts to approach an oversold position, it usually means that it could be a good time to buy and sell.

Conclusion

Now that you know what ATR is, it’s time to put this indicator into use. You could start by taking a screenshot of your crypto portfolio and comparing the ATRs of the various coins in your portfolio.

Also, try to determine if each coin has an ATR that’s frequently changing (or not). If they are, they might be a good investment as they may potentially pump.

Another strategy is to take screenshots of several coins in your portfolio and compare their ATRs. By looking at the charts, you can determine which coin is oversold and overbought. This could help you choose the best time to buy or sell a particular asset.

After doing this, you might realize that some coins have ATRs that are changing more frequently than others. This may also tell you whether or not these coins are volatile.

In any case, monitoring your portfolio is an excellent way to start developing good trading habits. For the most part, the ATR is a good indicator of volatility, and it allows you to determine which direction the market is headed overall. This can help you decide whether or not investing in a particular coin might be beneficial for your portfolio.

Therefore, knowing what is ATR is a great way to get started in understanding how the market works and how you can best utilize it for your benefit.