Market volatility can sometimes work against a trader. The ATR indicator is ideal to eliminate periods of low-pressure market.
ATR (Average True Range) is a technical analysis indicator that shows current market volatility. How to use the ATR indicator to increase the profit from deal to deal, how to install it in the terminal and what profit it can provide - learn from our guide!
The ATR indicator (also Average True Range) was designed to easily determine the volatility of currency pairs on Forex. It is the calculation of market variability that is the main task of this indicator. ATR itself refers to technical analysis indicators.
How the ATR indicator works
The ATR indicator is a standard Forex indicator that is installed in almost all trading platforms, including MetaTrader4 platforms. The indicator was developed by J. Wells Wilder, who presented it to the public in 1978. Many Forex traders initially took it cold, but over time it gained wide popularity in the Forex currency market. The Average True Range indicator means "true average range."
This indicator allows the trader to predict the future price change most accurately in order for the trader to calculate the places where Stop Lossa and Teek Profits should be installed. However, the indicator cannot calculate the direction of the trend line. The ATR indicator is a moving average and is displayed in a separate window of the sales term MetaTrader4.
What is a moving average?
The moving average indicator is one of the most popular trading tools for Forex technical market analysis. This value determines the average value of the sales instrument for a certain period. The period is selected directly by the trader. Advantage of such trading, as well as the indicators based on moving average (what our ATR is), the fact that it allows to trade in the direction of a trend as any change in price will make break in a curve is, signaling us about it.
The Average True Range indicator has always been characterized as the easiest way to identify an average price range. For this, True Range is immediately calculated, which consists of the three values shown below:
The minimum price for the same period is deducted from the maximum price for a certain period.
The closing price for the previous period is deducted from the absolute value of the price maximum.
The closing price for the previous period is deducted from the absolute value of the price minimum.
Then the obtained values are averaged, after which we output the average value of the ATR indicator range itself. The values we have received will give us information about when to buy and when to put up for sale. It is worth noting that Forex indicator ATR does not warn you about the imminent price reversal. It only shows the degree of market volatility at the moment - it is important!
After calculating the "true average range," the ATR indicator is plotted to represent the moving average for that range.
The indicator automatically is drawn. The task of the trader is only to properly analyze the obtained data. The ATR indicator shows us the average value between the maximum and the minimum price for the selected time period, so that the trader calculates the value of market volatility.
Average True Range indicator signals
It is worth noting that the Average True Range indicator is an oscillator. It 's easy enough to understand - the higher the readings, the higher the market volatility. Initially, the indicator uses a period of 14 days of trading, but the trader can issue another period of most interest to him. However, it is worth noting that the ATR indicator does not have constant levels of overbought and resale, although it is an oscillator indicator.
An important point is the fact that the ATR indicator constantly strives up with heavy price movement, no matter where it goes. For example, the price is in a downtrend - the indicator goes up, in an uptrend - still up.
What does it mean? The description of the ATR indicator tells us that if it falls, market variability decreases. It can be concluded that if the indicator is very low, there is practically no volatility accordingly. The price is prepared for the coming jump. I remind you, the indicator itself cannot show the direction of the price movement.
Use of the ATR indicator
How do I use the ATR indicator? After you set the average range level, the purchase signal will be generated exactly when the Average True Range indicator breaks it from the bottom up. The received should coincide with both junior timeframes and older timeframes. Would you like to receive additional signals? ATR can be used boldly with the CCI.
The indicator is used, as mentioned above, to get information about the future change in price, to later put up the necessary Stop Loss and Teek Profits. After you have received the required data from the indicator, you must open the item. Next, you should place all Stop Loss on par with the price extremes on Forex chart. Teek-Profites are set at resistance/support levels. The data provided by the Average True Range indicator will help you to bypass all market "noises" (short-term price manoeuvres). Reaching the price of an exposed Stop Loss means increasing the price range. After that you need to close all loss-making transactions. This is the way the ATR Forex indicator helps you to set Stop Loss at the maximum possible distance, avoiding market "noises." The indicator provides an opportunity to clearly analyze the volatility of the trading instrument, as well as to identify the size of the opening of the transaction.
The Average True Range indicator is very sensitive to changes in time periods. We have already found out that 14 days is standard for him. If you set the value below, the indicator itself receives less data for its work. What does it mean? The ATR indicator becomes the most sensitive to any price maneuvers.
If you have raised the value, you can see how the moving average of the indicator becomes smoother.
The description of the Average True Range indicator makes it clear to us that it has a number of disadvantages. One of them is late. It is associated with the use of a moving average. If the ATR period is large, it can indicate past market variability rather than the current one that we need. Therefore, it is recommended to use it in tandem with various trading instruments, such as GBP/JPY patterns.
What conclusions can be drawn? The ATR indicator will not help you in forecasting, it is designed to measure volatility. You will not know where the price will go - up or down, but nevertheless, it will help you to become a successful trader, will show where and when to put Stop-Loss, as well as Tek-Profites. Successful trade!