ATR-indicator: description and use on "Forex"

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. By monitoring the level of volatility, you can see how the value of a currency begins to change dramatically in a certain time period. This means that its level is high. If the price does not change much, but only small fluctuations are observed, this indicates low volatility. How correctly to measure its level?

For this purpose, special diagrams or oscillators are developed. With their help you can follow the market fluctuations in different periods of time: both for weeks and months, and for hours and even minutes. For example, traders actively use a tool such as ATR. What is it and how does it work?

What is ATR and what is it created for?

Indicator Average True Range, 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 now it is widely used among currency traders. At Forex, however, it is rarely used to discern the future direction of the price movement. More often it is only needed to get an idea of the recent volatility in order to prepare a future trading plan. Setting stops and entry points at profitable levels to prevent exit or quick 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 the indicators calculated on the basis of 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 values of the diagram assume that the frames for the "stop" can be wider, as well as the entry points. This helps to prevent the market from moving against you. By reading ATR, a trader can effectively act with strategies that monitor commensurate levels of price movement.

ATR indicator: formula

The ATR indicator is common, functioning on the Metatrader4 trading software, and the sequence calculation formula includes the following simple steps: for each selected period, you must calculate three absolute indicators:

A) High minus Low.

B) High minus Close of the previous period.

C) Close the previous period minus Low.

TrueRange, or TR, is the largest of the three above calculations. The ATR indicator is an oscillator that operates on the basis of the moving average for the selected length of the period. A typical installation of this length is "14".

How does this oscillator look like?

Computer programs perform the necessary computational work and reproduce the ATR-indicator in the form of a diagram.

The Average True Range consists of one fluctuation curve. For example, when trading with the GBP / USD currency pair, it is advisable to set its range from 5 to 29 points. On the "peaks" seen in the curve, you can visually see the "Candlesticks" expanding in size, which indicates the strength of the market position. If low values are maintained for a certain time period, then the market consolidates, and a breakout can be predicted.

How is the schedule displayed?

Understanding how the ATR indicator works (calculation formula, etc.) will allow you to examine in detail how this generator is used in the Forex market and how to read the various graphic 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 presented on a 15-minute chart for the GBP / USD currency pair. In this diagram, the 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 Forex?

The key reference points are lowpoints or long periods with low values. With this indicator it is better to work for longer time frames, that is on a daily basis. However, shorter periods can also be placed, and trade with them can also be successful. It should be remembered only that the ATR indicator is trying to convey the price volatility, and does not report price directions. The oscillator is traditionally used in tandem with other trend or pulse indicators , allowing you to establish stops and optimal entry point fields.

Possible errors

As with any technical indicator, the ATR diagram will never be 100% reliable. False signals can arise due to the lag in the quality of moving averages, but positive signals remain fairly consistent. In total, this allows the "Forex" -trader to obtain useful information for making transactions. Certain experience in interpreting and understanding ATR signals should be developed over time. In addition, it is also mandatory to supplement this tool with any other indicator. 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 an ATR indicator. Setting it up includes the above parameters, separated by periods.

Key points

"Forex" -trader should focus on the key points and capabilities of ATR, which include "peaks" of lowpoints. Like any technical indicator, this diagram has a certain percentage of errors in the signals it gives out. However, correctly interpreted signals can be quite consistent and useful.

The following trading system is intended to a greater extent for educational purposes. Technical analysis includes the previous behavior of prices and simultaneously tries to predict future prices. At the same time, 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 charts. The ATR indicator for Gerchik includes the following. The green circles in the diagram illustrate the optimal entry and exit points, and ovals of the same color indicate a breakthrough or reversal that is inevitable in 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 if the following conditions exist.

Determine your entry point when the RSI line falls below the "30" line (lower line limit), and add 25 "pips" (the ATR value should be "1.5X").

Set BuyLimit to no more than 2-3% of your account.

Place a stop loss on 25 "points" (with the 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 value from the previous peak.

Steps "2" and "3" are weighted risk management principles and monetary resources that should be used in trading operations. This simple trading system can provide a profitable trade by 100 "points." However, one must 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 you will successfully provide.