ATR indicator – an abbreviation for Average True Range, the description of work with which we will analyze in this article. Average True Range translates as average true range.
The ATR indicator was created in 1978 by J. Wells Wilder – the world famous guru of stock trading, who, in addition to ATR, presented traders with RSI and Parabolic SAR. All of them are actively used by traders to this day.
Average True Range belongs to the group of oscillators, users of the Metatrader terminal do not need to download this indicator, it is pre-installed by default. As with most charting and other trading platforms.
The ATR indicator line reflects the price volatility in the market, the higher the line, the higher the volatility and vice versa. At the same time, the indicator does not indicate either the direction of the trend, or its strength, or anything else, only volatility.
How to use ATR
First, let’s add the indicator to the chart. Go to the menu Insert-> Indicators-> Oscillators and select Average True Range there. The only significant indicator setting is the period, by default it is 14. The sensitivity of the indicator’s response to price fluctuations will depend on the change in this parameter:
- With a shorter period, the indicator will draw peaks even with a small price movement
- For a longer period, on the contrary, we will observe peaks only with sufficiently strong jumps in quotes.
Important Feature: on different currency pairs and different timeframes, you need to use a different indicator period, it is determined empirically… By changing the settings, you yourself will see whether areas with high volatility really cause the corresponding indicator reaction – growth. This means that by adjusting the ATR period, you need to ensure that the line is sensitive to the growth and fall of volatility.
Let me remind you that if market volatility grows, ATR also grows, if it falls, it also falls. You won’t get confused.
This is the main purpose of ATR. Let’s now take a look at the chart and try to read it based on the indicator readings. As we remember, ATR shows only volatility – price volatility. Therefore, in the chart below, we understand the indicator peaks and periods of its growth as areas with high volatility. This can be seen in the screenshot below:
A sharp price change has occurred – ATR draws a peak, if the market is in a narrow flat, sideways – ATR is directed horizontally and draws lows.
Read also: Forex terms
Next example. Please note here that periods of relatively low volatility cause the indicator to fall, and when the market “picks up” the indicator shows growth.
Areas of growth (not all) are highlighted in red, which are then replaced by short periods of calm – during which the indicator falls. For example, the hourly chart of the GBPUSD with a period ATR 8… And once again I remind you of the need to empirically select the settings for each timeframe and currency pair (or other instrument).
Thus, the ATR helps us determine whether a strong price movement is expected now, or the market is “going into hibernation”.
Hint from ATR
The market is arranged in such a way that after periods of sharp growth, sooner or later, there is always a damping. And vice versa – after hibernation comes awakening and a sharp growth. ATR suggests that when its lines are at their lows – expect a significant rise or fall, at the highs – a transition to flat. Look at the screenshot again and you will see confirmation of this. Knowing this principle, you yourself will understand how to use it in your trading strategy.
ATR is a fairly popular indicator, which, in addition to being used independently, is often included in other, more complex indicators and trading strategies. You may not even guess about it, but it is. It is not difficult to use the indicator, the main thing is not to forget to make adjustments to your currency pair and timeframe. Of course, trading based only on ATR readings is not reasonable, this rule applies to any indicator in general. But to supplement your trading strategy for efficiently and quickly identifying zones in which significant price fluctuations are expected is just right. After all, we all want to enter the market before the start of the “Rally”, when the quotes jump in one direction or another, and not at the “Pit Stop” – when the market freezes.