As everyone knows, volatility is the level of price volatility. In order to determine the possible risk, you need to know everything related to this indicator. Exercising control over the level of volatility, you can notice how the value of a currency begins to change dramatically in a certain time period. This means that her level is high. If the price does not change much, but only slight fluctuations are observed, this indicates a low volatility. How to measure its level?
For this purpose, special diagrams or oscillators are developed. With their help, you can track market fluctuations in different time periods: both for weeks and months, and for hours and even minutes. For example, traders are actively using a tool such as ATR. What is it and how does it work?
What is ATR and why is it created?
The Average True Range indicator , or ATR, was developed by Welles Wilder specifically to determine the volatility of price changes. From the very beginning, it was used in the commodity market, where this characteristic is more common, but at present it is widely used among currency traders. At Forex, however, it is rarely used to distinguish between future price movements. More often it is needed only in order to get an idea of the recent volatility in order to prepare a future trading plan. Setting stops and entry points at advantageous levels to prevent exits or fast turns is considered an advantage of this indicator.
Essence and Understanding Average True Range
The ATR indicator is classified as an “oscillator,” since in the display results the curve fluctuates between indicators calculated based on the level of price volatility for the selected period. It is not a leading indicator, since it does not display anything related to the direction of the price. High chart values suggest that the frames for the “stop” can be wider, as well as entry points. This prevents the market from moving against you. Thanks to reading ATR, a trader can effectively act with strategies that track proportional levels of price movements.
ATR indicator: formula
The ATR indicator is a general one, functioning on the Metatrader4 trading software, and the sequence calculation formula includes the following simple steps: for each selected period, three absolute indicators should be calculated:
a) High minus Low.
b) High minus Close of the previous period.
c) Close of the previous period minus Low.
TrueRange, or TR, is the largest of the three above calculations. ATR indicator is an oscillator operating on the basis of a moving average indicator over a selected period length. A typical setting of this length is "14".
What does this oscillator look like
Computer programs perform the necessary computational work and reproduce the ATR indicator in the form of a diagram.
Average True Range consists of a single fluctuating curve. For example, when trading with the GBP / USD currency pair, it is advisable to set its range from 5 to 29 points. At the “peaks” viewed in the curve, you can visually see the “Candlesticks” expanding in size, which indicates the strength of the market position. If low values remain during a certain time period, then the market is consolidating, and a breakthrough can be predicted.
How is the schedule set?
Understanding how the ATR indicator works (calculation formula, etc.) will allow you to consider in detail how this generator is used in the Forex market and how to read the various graphical signals that are generated on the charts. How to use ATR in the Forex market?
For example, an ATR with a period setting of “14” can be represented on a 15-minute chart for the GBP / USD currency pair. In this diagram, ATR will be displayed as a red line. The value of this oscillator in this case will vary from 5 to 29 "points".
ATR indicator: how to use on Forex?
Key reference points are lowpoints or long periods with low values. It is better to work with this indicator for a longer time frame, that is, on a daily basis. However, shorter periods can also be placed, and trading with them can also be successful. It should be remembered only that the ATR indicator is trying to convey price volatility, and does not report price directions. The oscillator is traditionally used in tandem with other trend or momentum indicators , which allow you to set stops and optimal fields of the entry point.
Possible errors
As with any technical indicator, the ATR chart will never be 100% reliable. False signals can occur due to a lag in the quality of moving averages, but positive signals remain fairly consistent. In total, this allows Forex traders to obtain useful information for transactions. Some experience with the ability to interpret and understand ATR signals must be developed over time. In addition, the addition of this tool to any other indicator is mandatory. This is recommended for further confirmation of possible trend changes.
Understanding the above principles will allow you to illustrate a simple trading system that can be built using the ATR indicator. Its configuration includes the above parameters, divided by periods.
Key points
Forex traders should focus on the key points and opportunities of ATR, which include the “peaks” of lowpoints. Like any technical indicator, this chart has a certain percentage of errors in the signals it issues. However, correctly interpreted signals can be quite consistent and useful.
The following trading system is intended primarily for educational purposes. Technical analysis includes previous price behavior and at the same time tries to predict future prices. However, it is well known that past results are not a guarantee of future results with the same market activity. Given this reservation, you should read the constructed graphs. Gerchik's ATR indicator includes the following. The green circles in the diagram illustrate the optimal entry and exit points, and ovals of the same color indicate a break or a reversal, which is inevitable with the current market trend. This use of ATR analysis is most effective in combination with the blue lines of the RSI indicator.
Conditions
A simple trading system will be implemented subject to the following conditions.
Determine your entry point when the RSI line drops below the “30” mark (lower line limit), and add 25 pips (ATR should be “1.5X”).
Set up BuyLimit no more than 2-3% of your account.
Place a stop loss 25 "points" (with an ATR value of "1.5x") below the entry point.
Determine the exit point when the RSI crosses the upper limit of the “70” line and is accompanied by a decrease in the ATR from the previous peak.
Steps "2" and "3" represent the balanced principles of risk and cash management that should be used in trading operations. This simple trading system can provide 100-point profitable trading. However, one should always remember that the past is not a guarantee for the future. Nevertheless, the study of sequences is your goal, and these data technical analysis and ATR indicators will successfully provide you.