ATR – A Unique Volatility Indicator: The ATR by its abbreviations in English «Average True Range» is an indicator of technical analysis that works as a volatility meter. It was introduced – along with many other tools of technical analysis – by Welles Wilder in his book, «New concepts in Technical Trading Systems». Today, ATR is one of the most commonly used indicators of technical analysis that has withstood the test of time and has opened the way on many trading platforms.
How does it work?
Although it may not seem like it, the idea behind the indicator is simple. The currency exchange rate always fluctuates. High volatility is one of the reasons why millions of traders around the world love the Forex market. The higher the volatility, the higher the number of potentially beneficial operations. With the volatility come the opportunities to operate. Of course, the direction of future tenure is important, but knowing that the trend is about to begin is also extremely useful. Moreover, for certain strategies it is not even necessary to know exactly the direction of the trend if the volatility is high enough. There are many ways to estimate market volatility and the ATR uses one of them.
To understand how the ATR works, it is necessary to take a look at the concept of true rank in the first place. According to Wilder, the true range is the largest of the following:
- The current Maximum less than the current Minimum,
- The current Maximum less than the previous Closing,
- The current Minimum lower than the previous Closing,
Absolute values are used for the last two entry points to ensure positive numbers.
The Average True Range is a moving average of the ranges mentioned above. By default, a mobile average period of 14 is used. The whole indicator is represented by only one line. When the volatility is high, the ATR chart will go up. Alternatively, when the market is stable, the line gravitates around the bottom.
How is it configured?
Adjusting the ATR indicator on the IQ Option platform is simple.
Click on the «indicators» button in the lower left corner of the screen. Then choose ATR from the list of possible indicators.
Then click on the «Apply» button. The indicator will appear at the bottom of the screen, just below the price chart.
The True Range Average is ready to be used.
How to use it to operate?
The indicator can be used by the inverter to determine optimal entry and exit points.
The longer the ATR period is, the more accurate the indicator will be, losing a part of the trading signals instead. And vice versa, by shortening the number of periods it is possible to receive more signals but there is a possibility that some may be false or at least not as precise as one might wish.
An important thing. The ATR uses absolute values instead of percentages. The indicators of different companies and even of the same company in different periods of time can not be compared adequately between them.
The True Range Average is not an indicator that shows the direction of a future trend or that provides complete information on how the price chart will behave. However, the ATR indicator is a unique indicator in its own way, since it helps to follow the behavior of the volatility of the share price. Combined with technical analysis tools that follow the trend or the moment, the ATR can be a decent instrument with a lot of potential.