Average True Range (ATR) is a technical indicator used in trading, particularly on the Forex market, that measures the volatility of an asset’s price movement. It was developed by Wells Wilder and described in his book “New Concepts in Technical Trading Systems.” Today, ATR is widely used by traders and incorporated into many trading strategies.
Using the ATR Indicator
The Average True Range indicator typically shows high values during strong price movements, whether upward or downward, when there are panic sales or active buying. During these times, market volatility is at its peak.
Low ATR values correspond to extended periods of sideways or neutral movement, which are common when the market is waiting for important news or lacks significant capital activity.
ATR can also be used like other volatility indicators. The principle is straightforward: the higher the ATR value, the greater the volatility, and thus the higher the likelihood of a trend change; the lower the ATR value, the weaker the trend direction.
Formula for Calculating the Average True Range (ATR)
The True Range is the greatest of the following three values:
- The difference between the current high and low;
- The difference between the previous close and the current high;
- The difference between the previous close and the current low.
ATR is the moving average of the True Range values.
FAQ
What is the Average True Range (ATR)?
The ATR is a technical indicator that measures the volatility of an asset’s price movement.
How is ATR calculated?
ATR is calculated as the moving average of the True Range, which is the greatest of three price differences.
Why is ATR important for traders?
ATR helps traders understand market volatility, which can influence entry and exit points in trades.
