Applicability To Futures Contracts Vs. Stocks
Since true range and ATR are calculated by subtracting prices, the volatility they compute does not change when historical prices are backadjusted by adding or subtracting a constant to every price. Backadjustments are often employed when splicing together individual monthly futures contracts to form a continuous futures contract spanning a long period of time. However the standard procedures used to compute volatility of stock prices, such as the standard deviation of logarithmic price ratios, are not invariant to (addition of a constant). Thus futures traders and analysts typically use one method (ATR) to calculate volatility, while stock traders and analysts typically use another (SD of log price ratios).
Read more about this topic: Average True Range
Famous quotes containing the words futures, contracts and/or stocks:
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—Gertrude Stein (1874–1946)
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—Charles Horton Cooley (1864–1929)
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—Ralph Waldo Emerson (1803–1882)