The Average True Range (ATR) is a technical analysis volatility indicator originally developed to simply measure the degree of price volatility. The indicator does not provide an indication of price trend. The true range indicator is the greatest value of the following:
- Current high less the current low
- The absolute value of the current high less the previous close
- The absolute value of the current low less the previous close
In Forex Trading, this indicator measures the amount of volatility in financial markets. It was presented by Welles Wilder in his book “New concepts in technical trading systems”. ATR is one of the main indicators used in Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course.
Strong moves, in either direction, are accompanied by large true ranges. Small moves is accompanied by relatively narrow ranges. As such, ATR can be used to validate the strength behind a breakout. A bullish reversal with an increase in ATR shows strong buying pressure and it reinforces the reversal. A low ATR shows price consolidation.
The Average True Range will drop to a very low value often after a significant drop in price, which usually happens as a result of panic or hunting stop loss orders (Risk Liquidation) in the financial markets. Low values of this indicator are typically idol for range trading. The Average True Range can be also interpreted the same way of other oscillators, which could be formulated as follows: When the indicator’s value rises, then the likelihood of a change in direction also gets higher, and when the indicator’s value are low, then it is less likely for the price to change its direction, and thus indicates trading within ranges.
Apart from being a trend strength gauge, ATR serves in positioning the stop loss point. Since the ATR is calculated using the high and low points of the price move, then the current ATR value (or a multiple of it) can be thought of as the stop-loss distance from the entry point. Usually this indicator is used as part of many other trading systems and it usually gives better results when used with other technical indicators such as the Moving Average and Fibonacci Retracements.