Chartered Market Technician (CMT) Practice Exam

How does the Average True Range (ATR) relate to lower-priced and higher-priced securities?

1. Lower-priced have higher ATR; higher-priced have lower ATR

2. Lower-priced have lower ATR; higher-priced have higher ATR

3. Both have equal ATR

4. Lower-priced have higher volatility than higher-priced

The correct answer is: Lower-priced have lower ATR; higher-priced have higher ATR

The Average True Range (ATR) is a measure of volatility that indicates the degree of price movement of a security over a specified period. When considering the relationship between ATR and the price levels of securities, it is important to recognize that lower-priced securities tend to experience greater percentage changes in price due to the lower absolute price levels. This translates to a relatively lower ATR, as the movements in price, even if they appear larger in absolute terms, represent less volatility when expressed as a percentage of the security's price. Conversely, higher-priced securities, while they can exhibit substantial price movements in absolute terms as well, tend to have a higher ATR relative to their price levels, particularly when compared against lower-priced securities. This phenomenon occurs because higher-priced securities can provide larger absolute price changes without necessarily reflecting greater percentages, which can lead to a higher ATR figure. Therefore, the idea that lower-priced securities have lower ATR values and higher-priced ones have higher ATR is a reflection of the inherent differences in how price changes manifest relative to their absolute values. The principle illustrates the relation between price levels and volatility as measured by ATR, and it highlights the importance of understanding how ATR can differ widely across securities based on their price classifications.