The Average True Range indicator (ATR) gives us an indication of volatility for the market. Initially, traders might use this indicator to get an idea of how much movement occurs typically over a period of time. The suggested time frame would be a 14 period which would be 14 weeks on a weekly chart, 14 days on a daily chart, or 14 hours on an hourly chart, etc. This can be helpful when determining stop losses – making sure to set a stop that gives room for movement.
The range is calculated by taking the greatest of 3 possible values:
- The difference between the high and low of the current candle.
- The difference between the prior close and the current high.
- The difference between the prior close and the current low.
The average is then taken for the last 14 candles based on the suggested time period. We can use this measurement of volatility to help recognize potential changes in the trend. Typically, volatility will increase prior to a change in trend. As the ATR climbs, indicating greater volatility, it can be a warning of a potential change in trend.
As the volatility decreases, the ATR weakens, indicating a weakening of the current trend. This would usually be interpreted as a consolidation phase. As always, it’s best to use with other indicators for confirmation.
No comments yet.