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Average true range (ATR) is a forex market indicator first introduced by Welles Wilder in his publication “New Concepts in Technical Trading Systems”. Initially, it was created for commodity markets with higher volatility. However, forex ATR thereafter became widely used in forex trading as well effectively measuring the level of market volatility.
ATR in forex strategies is a widely used indicator for intraday, weekly and monthly estimations. The indicator’s extreme values might testify the start of a new movement. Its low levels might be a sign of intensive trading within a wide range. Protracted preservation of low ATR values might evidence consolidation likely to lead to continued quick movement or reversal. High ATR figures generally ensue after quick movements, and are most likely to persists for short time periods.
Indicator ATR calculation technique
The value of trade range (TR) can be calculated using one of the following methods:
- TR = Current high – Previous low
- TR = Current high – Previous close
- TR = Current low – Previous close
If the range of fluctuations (i.e. different between high and low) within a period is quite large, calculation method 1 may be the most appropriate. To the contrary, when such difference is rather quite small, methods 2 and 3 will apply for calculating the value of TR. Most often, such situations when the difference is rather small occur in the case of gaps or disruptions in the market.
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Overall, the main concept of ATR and its use in ATR forex strategies can be summarized as follows: the higher ATR, the more likely the trend reversal; and the lower the indicator’s value, the weaker the trend’s direction.
Examples of an ATR forex strategy may include Chandelier Exit, ATR breakout, ATR channel breakout, and many other forex market strategies based on volatility.
In the Chandelier Exit ATR forex strategy, the level of stop losses is represented by ATRs. Under this strategy, stop loss is achieved when price touches the maximum high less 3 ATRs or maximum close less 3 ATRs. In the ATR breakout ATR forex trading strategy, average true range is used for tracking down the moment when the market is ready to accelerate, and the milestone point is 14 EMA (when ATR is above this point, trade is successful).
Overall, it can be stated that ATR is an easy and understandable indicator which you may effectively use in your forex trading transactions.
Related: Trading Indicators – Volume spread analysis indicator
Source: ForexChief
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