The Average True Range (ATR) provides information about the volatility of the price. However, one of the drawbacks of the ATR is that it does not provide the direction of the trend, or change in direction. The AdaptiveATR overcomes this drawback by using an adaptive feedback mechanism for calculating the ATR.
The original ATR uses High, Low, and Close prices for calculations, whereas AdaptiveATR uses only High and Low prices. As a result, it exhibits a greater sensitivity to volatility and change in direction.
In the first step, we calculate the average price based on the High and the Low. In the next step, we calculate the difference of the Average price from its previous Average price. Using concepts of signal-processing, the noise factor is calculated based on this difference. Finally, we subtract the noise from the accumulated Difference over the specified ATR Period.
When AdaptiveATR is rising it implies that the trend is continuing with strength. On the contrary, when AdaptiveATR peaks out and starts falling it indicates that the trend has exhausted and the probability of reversal is imminent.
BUY / EXIT SHORT - Enter LONG (or exit SHORT) when the AdaptiveATR indicator has peaked and the price is falling or has bottomed out. Place the stop-loss below the nearest Swing Low. It is recommended to employ a trailing stop when the trade turns profitable.
SHORT / EXIT LONG - Enter SHORT (or exit LONG) when the AdaptiveATR indicator has peaked and the price is rising or has topped out. Place the stop-loss above the nearest Swing High. It is recommended to employ a trailing stop when the trade turns profitable.