Average True Range (ATR)

Developed by J. Welles Wilder, ATR is a technical volatility indicator. The indicator was originally developed for the commodity market, however it is widely used in FOREX today. The indicator does not provide buy/sell signals by itself; It is an indicator that should be used with other indicators. When used with MACD it can lessen the chance of being wipsawed. It is also a good tool for stop losses (IE: stop at 30% of the daily ATR).

ATR is a volatility 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 don’t adjust for the increase in volatility, your stops will be hit more easily when the price moves against you, and your profits will not be maximized when the price moves in your favor.

ATR is the moving average of the True Range for the period (14 days by default). True Range is the greatest of the following three:

• Difference between the High of the last bar, and the Close of the bar before it.
• Difference between the Low of the last bar, and the Close of the bar before it.
• Difference betwen the High and the Low of the last bar.

Do this back 14 bars and you have the average, which is ATR. You can use multiples of ATR to set stops. Say your long entry was at 1.2300, and the current value of ATR was .0090 and your wanted to use a multiplier of 3x. Then 3 x .0090 = 0.0270. Since you are long, you would set your stop to 1.2300 – 0.0270 = 1.2030 which is a 270 pip stop. 2 times ATR would give a 180 pip stop and .3 times ATR would give a 27 pip stop.

ATR Example:

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Tags: Consolidating Market, Stop Losses, Trending Market, Volatility, Wilder