Trading Worker
Indicator: NATR indicator with Forumla, Strategy, Advantages and Limitations - Trading Worker
Home Login Register

NATR (Normalized Average True Range)

The Normalized Average True Range (NATR) is a technical indicator that measures volatility by expressing the Average True Range (ATR) as a percentage of the closing price. This normalization makes it easier to compare volatility across different securities, regardless of their price levels.

Formula

NATR = (ATR / Close Price) × 100
Where:
ATR = Average True Range
True Range = Maximum of:
- Current High - Current Low
- |Current High - Previous Close|
- |Current Low - Previous Close|

How NATR Works

NATR helps traders identify periods of high and low volatility in a market. Higher NATR values indicate increased volatility, while lower values suggest reduced volatility. The normalization aspect makes it particularly useful for comparing volatility across different instruments or markets, as it expresses volatility as a percentage rather than an absolute value.

Trading Strategies Using NATR

Strategy Examples

  • Use NATR to adjust position sizes based on volatility
  • Set dynamic stop-loss levels using NATR multiples
  • Identify potential breakout opportunities during volatility expansion
  • Filter trades during extreme volatility conditions
  • Use NATR for volatility-based pair trading

Support and Resistance Strategy

  • Use NATR to determine stop placement from S/R levels
  • Adjust support/resistance zones based on volatility
  • Identify stronger S/R levels during low volatility periods
  • Monitor breakout validity using NATR thresholds
  • Scale position sizes at S/R based on NATR readings

Trend Identification

  • Rising NATR suggests increasing trend strength
  • Falling NATR indicates potential trend exhaustion
  • Use NATR divergence with price for trend reversals
  • Compare NATR across timeframes for trend confirmation
  • Monitor NATR patterns for trend continuation signals

Advantages and Limitations

Advantages

  • Easy comparison of volatility across different securities
  • Helps in position sizing and risk management
  • Useful for identifying potential breakout opportunities
  • Effective for cross-market analysis

Limitations

  • Lagging indicator as it uses historical data
  • May give false signals in choppy markets
  • Requires additional confirmation from other indicators
  • Not suitable as a standalone trading tool

Best Practices When Using NATR

  • Use multiple timeframes to confirm volatility signals
  • Combine with other technical indicators for validation
  • Adjust position sizes based on NATR readings
  • Monitor NATR trends for potential market regime changes
  • Use NATR to set appropriate stop-loss distances
  • Consider market conditions when interpreting NATR values
  • Look for confluence between NATR and other volatility indicators
  • Backtest different NATR calculation periods
  • Document which NATR patterns work best for your trading style
  • Regularly review and optimize your NATR-based risk management