I have never used ATR (average true range) before and it looks quite an interesting indicator. could someone whose used it before please outline some of teh drawbacks and pros of it and when it is effective? i always needed a volatility indicator for my system and currently rely on implied black-scholes volatility from options. If ATR is a decent substitute for it i can cancel my options data feeds cause i dont trade options.
I use ADR, average daily range (not including the overnight gaps of ATR), as a volatility measure for most of my trading. I use it in deciding position size. It's not really an indicator, just a measure of the stock's historic volatility. So it's backward looking, whereas implied volatility is forward looking, because it's the market's guess of what future volatility will be. So do you want to look at historical information that may not correlate to the future, or do you want to look at the market's collective guess? Six of one, half a dozen of another if you ask me.
I use the price trading range from various timeframes. I remember analyzing the 10 day range, 20 day, 50 day, 100 day range. Attached is volatility data for SPY stock. At the time I remember comparing the volatility of the unmanaged Standard And Poors 500 Index tracking stock, symbol SPY, with the performance of various mutual funds. I remember hearing criticism of fund managers because SPY returns outperform the returns of many stock mutual funds. My studies show that in some cases the volatility of funds is less than the volatility of SPY stock. I do not see it publicized but some managers are able to show good returns with much less volatility than the general market index.