Average True Range (ATR)

FX Strategy Video > Forex Trading Indicators

In order to understand what the Average True Range indicator is, you must first understand what the True Range indicator is. While the True Range indicator is rarely used anymore, the ATR – a derivative of it – quite often is.

The True Range indicator can be defined as the greatest of the following possibilities:

  • Current high minus the current low of the chart.
  • The absolute value of the current high minus the previous candle’s close. 
  • The absolute value of the current low minus the previous candle’s close.

The Average True Range is a moving average of the true ranges. In other words, it is a smoothed out representation of those calculations mentioned above. This makes it much easier for traders to gauge whether or not a pair is acting more or less volatile than usual. This can be important if you are looking for a potential entry signal as pairs will only be quite for so long. When the ATR is well under the norm, it often is followed by an explosive move in one direction or another.

The emphasis is “one direction or another”. This indicator simply measures whether or not we are moving within out of normal measures of volatility in the pair. It doesn’t tell us which direction we are looking to go.

Some traders will use this indicator in a very simple way: Wait for a move in one direction that exceeds the average ATR, showing that there has been a shift in market behavior as not only did the traders go in one direction – but they also went farther in that direction than usual. This can give hints towards the conviction of the recent move.

ATR can be used as a main indicator if used in a similar manner as described above. However, many traders will also use trend lines and the like to identify significant areas in which to look for volatility spikes as can be seen in the ATR window.

Published on 17th of June 2011
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