The average true range (ATR) indicator is developed by J.Welles Wilder and it is used to measure the volatility of a currency pair. Unlike the other forex indicators we have went through so far, the average true range (ATR) indicator does not provide any indication of the price movement.
There are a total of 3 different ways you can calculate the average true range (ATR) of a currency pair.
- Recent High minus the Recent Low
- Recent High minus the previous Close
- Recent Low minus the previous Close
However the value that you will use as the true range will depend on which of them are larger. With your trading platform, there is usually no need to calculate these values yourself. Your trading platform will help you to calculate the value and plot it into a graph.
So How Can You Use the Average True Range (ATR) Indicator?
Although this indicator cannot give you an indication of the direction of the market movement, it can be a good tool to help you verify the strength of the current market.
When the ATR indicator is showing small values, it is usually a sign that the market is consolidating or moving with small movement waiting for a breakout.
When you see the ATR indicator showing you large value, it is a sign that the market is trending strongly or you are in a valid breakout.
If you are a breakout trader, this indicator can be a great tool to add to your trading. When you see the ATR showing small values, you will wait for a breakout to occur. Once you see a trend line break together with rise in the ATR, this is a good sign of a breakout occurring.
Besides using the average true range indicator as a breakout tool, you can also use it in trend trading. When you are performing trend trading, you can use this ATR indicator to help you verify whether you are in a strong trending market or not.
If you have anything to share, do feel free to comment at the bottom of the post.