Understanding the Normalized Average True Range (NATR)

The Normalized Average True Range (NATR) is a volatility indicator that measures the volatility of a security relative to its price. It normalizes the Average True Range (ATR) to provide a percentage-based view of volatility. This helps traders compare volatility across different securities or time periods.

What is the Normalized Average True Range (NATR)?

The Normalized Average True Range converts the Average True Range into a percentage of the security's price. This normalization makes it easier to compare volatility across securities with different price levels.

How is the Normalized Average True Range (NATR) Calculated?

The NATR is calculated using the following steps:

1. Calculate the Average True Range (ATR) for the specified period.

   • For a simple moving average (SMA): $$\text{ATR}_{\text{SMA}} = \frac{\sum_{i=1}^{n} \text{TR}_i}{n}$$
   • For an exponential moving average (EMA): $$\text{ATR}_{\text{EMA}} = \text{EMA}(\text{TR}, n)$$

2. Normalize the ATR by dividing it by the closing price of the security and multiplying by 100 to convert it into a percentage:

   $$\text{NATR} = \left(\frac{\text{ATR}}{\text{Close}}\right) \times 100$$

Formula Example

Assume the following Average True Range (ATR) and closing prices for a 14-day period:

• ATR values: [2.5, 2.8, 3.0, 2.7, 3.2, 3.1, 2.9, 3.4, 3.3, 2.6, 3.0, 2.9, 3.1, 3.0]
• Closing prices: [50.0, 51.0, 52.0, 50.5, 53.0, 52.5, 51.5, 54.0, 53.5, 50.0, 52.0, 51.0, 52.0, 53.0]

To calculate the NATR:

1. Calculate the ATR:

   • For simplicity, let's use the average ATR from the list: 2.97

2. Calculate the NATR for each day:

   • Example for closing price of 52.0: $$\text{NATR} = \left(\frac{2.97}{52.0}\right) \times 100 \approx 5.71\%$$

Uses of the Normalized Average True Range (NATR)

The NATR is used for:

1. Volatility Comparison

• Cross-Security Comparison: Allows for the comparison of volatility across different securities regardless of their price levels.

2. Risk Management

• Volatility Adjustment: Helps traders adjust their strategies based on the volatility percentage. Higher NATR values indicate higher volatility.

3. Trade Strategy Adjustment

• Volatility-Based Position Sizing: Assists in adjusting position sizes based on the normalized volatility of the security.

Parameters

Here are the key parameters for configuring the Normalized Average True Range indicator:

• Data Offset (pod):

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods used in the calculation.

• Data Type (data):

  • Default Value: hlc (high, low, close)
  • Options: hlc (high, low, close)
  • Description: Specifies the price data used for calculation.

• Period (n):

  • Default Value: 14
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods for calculating the Average True Range.

Advantages of the Normalized Average True Range (NATR)

• Relative Volatility Measure: Provides a percentage-based view of volatility, making it easier to compare across different price levels.
• Adjusts for Price Differences: Normalization helps in comparing securities with different price levels on a common scale.

Limitations of the Normalized Average True Range (NATR)

• Lagging Indicator: As with ATR, it is based on past price movements and may lag current market conditions.
• Percentage Limitations: The normalization might not always account for extreme volatility variations effectively.

Conclusion

The Normalized Average True Range (NATR) is a valuable tool for assessing and comparing market volatility. By normalizing the ATR, traders can gain a clearer perspective on volatility relative to price, helping in more informed trading and risk management decisions.