ATR stands for Average True Range. This is another famous indicator developed by J. Welles Wilder. In short, this indicator indicates the volatility of the market at particular time. This is not a directional indicator; it does not indicate the direction of the prices. Lets look into more details below.
What is a true range?
Wilder quantify the volatility of the market with true range. A true range is the greatest among the following 3 items.
- Current high minus current low.
- Current high minus previous close.
- Current low minus previous close.
The true range is always positive number. From the calculation above, we know that the true range (volatility) will increase when: there is long candle, or when there are big gap between candles.
Average True Range.
Average True Range is the moving average of True Range. Usually the period is set as 14 for 14 moving average of the true range. The other favorite number is 21. The number can be customized to meet the trading needs.
Using ATR
ATR can is an indicator for market volatility. The value in ATR has no real meaning, because it is relative to each other. Some pairs will have larger value than other. Some use low ATR value to predict possible turning point of the price, however this is not always accurate.
Another way to use ATR is using it to set stops. This is because we need wider stops when the market volatility is high; and we can set narrow stops when the market volatility is low. Usually we can set stops based on 2 to 4 times of ATR value.
Another way to use ATR is avoid whipsaw. If we trading breakout, usually we enter once breakout occur, however whipsaws can occur too. By using ATR, we enter on breakout plus 20%ATR, this will give some filter against whipsaw.
To learn more about ATR, here are 2 websites that have more detailed information:
