Munbai Stock Exchange BSE Sensex Analysis

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Market Volatility - Average True Range
 

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Average True Range is an excellent measure of volatility over a defined period. When you read that the markets are becoming very volatile, this will define that subjective description in a mathematical form.

The illustration here shows the Average True Range (ATR) over a ten day period when applied to the Shanghai Composite Index. Note the small ATR in December 2007 as the Chinese market continued its steady rise. The ATR can be used as a tool to predict stability, when the trend is up and ATR or volatility, is low then you have steady growth.

Note the high spike in the value in June 2007 where there is huge volatility (instability) which followed a long period of growth.

To calculate Average True Range:

True range is the largest of the following:

The difference between the current high and the current low
The difference between the current high and the previous close
The difference between the current low and the previous close

The average true range is the average of the true ranges over a number of previous trading periods, say 10 days.

The daily BSE Sensex Index analysis on this site uses a ten day average of the Average True Range to determine if the volatility is increasing or decreasing. More volatility can equal more risk.

 

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