The ATR Indicator Explained

What is the ATR Indicator and its Role within Forex Strategies

  • The ATR is one of the most popular indicator
  • The best indicator to show market’s volatility
  • ATR indicator strategy is mostly used as a confirmation indicator

What is the ATR indicator?

The ATR indicator MT4 represents the average true range indicator that has been using in trading and technical analysis.  ATR indicator Forex measures the volatility by using the 14 SMA of prices. It also displays projected highs and lows of a market. The ATR does not show the direction, just volatility.

How Does the ATR Work

J. Welles Wilder developed the ATR. The primary use of the ATR indicator is to measure the distance between the previous highs and lows for a set number of periods. Decimals display the ATR To indicate the number of pips between the highs and lows. But it can also be shown as digits too. The ATR value is essential to the intraday trader.  

Why is the ATR important for Forex Traders?

Before developing the ATR, Wilder created a concept called True Range (TR), which is defined as: 

Method 1: the current Low is less than the current high 

Method 2: the previous Close is higher than the Current High

Method 3: the previous Close is higher than the current low 

In contrast to other indicators like moving averages and oscillators, the true average range is rarely used as a primary indicator for generating trading signals. ATR indicator strategy is mostly used as a confirmation indicator or an indicator for preventing false signals from other sources. 

ATR  Indicator Explained

As explained above, ATR is a figure that provides information about the current market volatility. 

It also indicates how much the markets moved in a certain direction. For example, ATR can prevent late entries from trend entry signals coming from trend indicators or other sources of technical analysis. 

A high ATR value when you are receiving a trend signal indicates that you might have come late to the party since the high ATR value indicates a high activity during the previous periods, signalling that the trend might be nearing its end. So even if you got an entry signal from, e.g. a MACD crossover, it might not be such a good idea after all. 

ATR Indicator Formula

  • ATR = ((Previous ATR x Periods – 1) + Current TR) / Periods
  • Where TR is the True Range, which is calculated as follows:
  • TR = max(high, previous close) – min(low, previous close)

In the chart above, we can see a typical three SMA setup. If we monitor the ATR indicator simultaneously, however, we can notice that before the crossover took place, we had a non-typical increase of volatility. 

If we look at the chart, we can observe that the price fell unusually fast, not allowing the EMAs to follow accordingly. The high ATR level hints that this signal might have arrived a little bit too late and that the trend might have already been exhausted. Indeed, the price movement following this event confirms the concerns raised by the ATR.

In this case, the ATR indicator would have saved us from a false positive and a reversal that would lead to potential losses.

Intraday Traders and ATR

For intraday trading, it is critical to trade markets with good ATR. Low ATR markets require higher leverage to compensate for lack of movement. The ATR indicator MT5 is one of the ATR best indicators as well as ATR bar indicator MT4. 

  • It helps you trade outside of the low range 
  • It adds the odds to your favour
  • You could make more pips by using the ATR
  • makes your account grow mote exponentially
  • It makes you think more about money management

Additional ATR Indicators

In Forex trading we can also find:

  • ATR indicator rate
  • ATR ratio indicator
  • ATR range trading indicator
  • ATR stop indicator

ATR Indicator Use in Forex Strategies

Average True Range, as any other technical indicator, always needs to be used in context. An out of context interpretation of ATR values can generate a lot of false signals that could lead to substantial losses. There are also ATR channel indicator and ATR candle indicator

Therefore, when using the ATR indicator, always consider the fundamentals that currently move the market, and combine the signals with other confirmation signals, such as trend indicators, support/resistance levels and the relevant price action taking place on the chart.

One of the strategies named the Black Widow uses the Daily ATR indicator as the means to calculate trading zones. When the price gets to the higher zone, traders should look for a sell. If a market proceeds lower, traders will look to buy. It can be coupled with other indicators too for additional confluence points. See it in the Black Widow examples here

What Did We Learn From the ATR Indicator

  • We consider the ATR as a volatility indicator, and it is the best indicator in the markets.
  • We use the decimals to display the ATR 
  • When volatility increases, the ATR will increase too
  • We use the ATR to actively manage existing positions
  • The higher the ATR, the greater the Stop Loss
  • This helps intraday traders.
  • Wide stop on less volatile markets is not recommended by the ATR indicator, and it holds for limit orders
  • If ATR is a higher value, traders may seek more pips on a specific trade.
  • Conversely, if ATR is indicating volatility is low, traders may temper their trading expectations with smaller limit orders
  • ATR on MT4 is not very comfortable to use, its harder to read as it is based on decimal values
  • Many traders use crossovers with ATR MT4 indicator to give them exits or possible entries

Common Questions on ATR Indicator

How do you read atr indicators in Forex?

By applying the ATR indicator to the MT4 or MT5 platform at the bottom of the chart. The ATR indicator is easy to apply and to read as it shows the digital value. By adding the ATR indicator to your intraday charts, you will be able to see a well-defined and very precise range of any market you trade.

Is the ATR Indicator reliable for Long Term Trading?

The ATR is one of the most useful indicators for long-term investors to monitor because they should expect times of increased volatility whenever the value of the ATR has remained relatively stable for extended periods of time. Investors look very often into the ATR indicator as periods of volatility change during different times, and especially during crisis.

So don’t wait! Just go ahead and purchase the best ATR trading system available – The Black Widow

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