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Forex Indicator ATR

The “Average True Range”, or “ATR”, indicator was developed by J. Welles Wilder to measure the volatility of price changes, initially for the commodities market where volatility is more prevalent, but it is now widely used by forex traders as well. Traders rarely use the indicator to discern future price movement directions, but use it to gain a perception of what recent historical volatility is in order to prepare an execution plan for trading. Setting stops and entry points at beneficial levels to prevent being stopped out or whipsawed are seen as benefits of this indicator.

The ATR is classified as an “oscillator” since the resulting curve fluctuates between values calculated based on the level of price volatility over a selected period. It is not a leading indicator in that it divulges nothing related to price direction. High values suggest that stops be wider, as well as entry points to prevent having the market move quickly against you. With a percentage of the ATR reading, the trader can effectively act with orders involving proportionate sizing levels customized for the currency at hand.

ATR Formula

The ATR indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:

  1. For each period chosen, calculate three absolute values: a) the “High” minus the “Low”, b) the “High” minus the previous period’s “Close”, and c) the previous period’s “Close” minus the “Low”;
  2. The “True Range”, or TR, is the greatest of the three previous calculations;
  3. The ATR is the moving average over the chosen period length. Typical length setting is “14”.

 

 

Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. 

 

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