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How can I calculate Bank Nifty movement in a week (Friday to Thursday)? Can I predict how many points the index can move in a particular week?
Pinku Das
The magnitude of movement in Bank Nifty or for any other security for the matter can be predicted by looking at how it has been moving in the past. For this, an indicator named Average True Range (ATR) can be very handy.
The ATR represents the average of the true range over a specific period. The true range for a given day is determined as the greatest among three values: a) the difference between the day’s highest and lowest prices; b) the day’s highest price minus the previous day’s closing price; and c) the day’s lowest price minus the previous day’s closing price.
The ATR-14 on daily chart, which calculates the average true range over the last 14 days, is the most commonly used variant. This period can be adjusted according to your preferences, such as using 14 weeks or 10 weeks etc.
For example, on Friday, Bank Nifty closed at 44,436 and the 14-week ATR stood 1,087. Let’s assume a closing at 44,400 with an ATR of 1,000. Now, you can estimate that Bank Nifty may move around 1,000 points in either direction within the coming week. This implies it could reach 45,400 if it rallies or drop to 43,400 if it declines. Traders need to identify key support and resistance levels within this range, as they can constrain the price movement.
ATR provides insight into potential price range, but does not offer a directional prediction. Additionally, if volatility surges, the index may surpass the ATR’s suggested limits.
While ATR doesn’t predict direction, it gauges the strength of the current trend. A rising ATR during a rally indicates a strong uptrend, and vice-versa. However, it’s essential to note that ATR cannot perpetually increase. Analysing historical levels can help determine whether the index is approaching a peak or bottom. For instance, the current weekly ATR is similar to early 2020 levels, indicating that ATR is near a four-year low. This suggests that volatility may rise in the coming weeks.
Send your queries to derivatives@thehindu.co.in
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