Normalized Average True Range (NATR) (Volatility)

The Normalized Average True Range (NATR) (Volatility) indicator provides a normalized measurement of price volatility, allowing for more accurate historical comparisons and long-term analysis compared to standard ATR. By expressing volatility as a percentage, it enables traders to assess market fluctuations across different price levels and assets consistently.

Usage

The NATR can be used to identify periods of high and low volatility relative to price action. Unlike the standard Average True Range, which is denominated in the asset's currency, the NATR output is a percentage. This makes it particularly useful for comparing the volatility of a stock when it was trading at $10 versus when it is trading at $100.

The indicator also includes a Relative Volatility mode and an optional Stochastic overlay:

• Absolute Volatility: When Relative Volatility is disabled, the indicator shows the standard normalized ATR percentage.
• Relative Volatility: When enabled, the indicator calculates the strength of volatility changes on a scale of 0-100.
• Stochastic Analysis: By enabling the "Show Stochastic" feature, users can apply a stochastic oscillator to the NATR values. This helps identify overbought or oversold conditions in volatility itself, signaling when a trend might be overextended or when a breakout is likely due to extreme volatility compression.

Details

The script calculates volatility by taking the difference between the high and low (including the previous close) and dividing it by the average price, which is then smoothed using a Running Moving Average (RMA). This normalization process ensures that the volatility reading is proportionate to the price level.

Additionally, the NATR considers the high and low prices in its equation, providing a different perspective than Bollinger Band Width, which typically relies solely on closing prices.

Settings

• Length: Sets the lookback period for the primary NATR calculation (default is 14).
• Relative Volatility (0-100): Toggles between absolute normalized volatility and a relative percentage scale.
• Show Stochastic: Enables the Stochastic %K and %D lines based on the NATR values.
• K: The lookback period for the Stochastic %K calculation.
• D: The smoothing period for the Stochastic %D line.
• Smooth: The smoothing factor applied to the %K line.

FAQ

How do I interpret high NATR values? High NATR values indicate that the asset is experiencing significant price swings relative to its current price, often seen during market panics or strong breakouts.

What is the benefit of the Stochastic option? The Stochastic option allows you to see how current volatility compares to its historical range over a specific period, helping to identify "exhaustion" in volatility.

How can I access this tool? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.