The ATR indicator is one of the most powerful indicators to add to your technical tools.
This indicator gives you a comprehensive overview of the assets you are trading with the leading forex company NSFX.
But you may be wondering what exactly is the ATR indicator?
How do you use it in your trading business?
Well, in this article we will tell you what the ATR indicator is, how to calculate it and how to use it.
What is the ATR indicator?
The ATR or Average True Range indicator revolves around the concept of volatility. Before we talk about the Average True Range indicator, let’s briefly explain the exact volatility. Then you will immediately understand why the ATR indicator is so handy.
The price of an underlying asset such as stocks or indices is constantly changing. The price can go up or down. The term for impact motion is volatility.
When there is a fixed price for the underlying asset such that it will not move up or down, volatility is low. The strongly moving crypto price is characterized by high volatility. Now that the concept of volatility is clear, it’s time to understand the Average True Range indicator.
Wells Wilder developed his indicator while looking at the commodity markets. He realized that looking at today’s range was too simplistic a measure of volatility. This is due to the way commodities often rise or fall in limited amounts – or, for example, the previous day’s price gaps compared to the new open.
That is, in order to adequately reflect real market volatility, the previous day’s closing price as well as the current high and low also had to be taken into account. Based on this insight, he defined True Range as the largest of the following three values:
The distance between the highest and lowest present value
Or the distance between the previous close and the current high
Then Wilder suggested taking the average of this value over several days to get a useful plot of volatility. Thus the Average True Range indicator was born.
Technical analysis is quite complex at first glance, but it is definitely a “skill” that can be learned. In addition, it will be easier than ever in 2020, because there is a lot of potential in this area of analysis, which will help you with various calculations.
Why Use Trading Indicators?
The literal translation of trading indicators is of course a trading indicator. So it really is a signal you can (or should) trade. A trading indicator is always intended to highlight or provide insight into one or more of the following aspects:
Determine the time of purchase
Determine the timing of the sale
Pattern – drawing
support and resistance levels
And of course it’s good to have all these elements in one indicator. Therefore, most traders who are experts in technical analysis also use multiple trading indicators in tandem.
There are trading indicators that aim to present as broad a picture as possible, so try to cover as many of the above points as possible. There are very specific trading indicators that are very focused on a single point and provide as much information and insight as possible.
The Average True Range (ATR) indicator falls into the latter category. The ultimate goal of this indicator is to provide a complete insight into price volatility in order to provide traders with important information in the decision-making process regarding the right entry (entry) or exit (exit) moment.
How to profit with the ATR indicator?
Although the Average True Range indicator’s formula runs in the background and you immediately see the correct multiplication line, it’s shorter to say that you don’t have to calculate anything anymore.
This is also a complicating factor for this indicator compared to other indicators. Because even if the level of volatility is set for you, it is not enough what you should do next.
The first way to apply ATR
Wilder originally suggested the ATR trading strategy, which was an important part of his trending after the volatility system. The rules assume that you have entered a trend-following trade – for example, by buying in a market that is making new highs every day.
The rules of this ATR trading system are fairly easy to follow and effectively tell you where to stop (sell) and reverse your position (in the case of futures or CFD trading):
Multiply the ATR by a Kconstants. Wilder 3 recommended the constant and called the resulting value ARC.
Find the significant degree (SIC). This is a very positive conclusion in the previous n
Take the square and the corresponding position 1 ARC from SIC
This is intended for use with daily values, and for these rules, n is set to 7 to be fast enough to react to fluctuations.
More broadly, you can use the ATR as a guide to interest in crypto and track price movements in the market. For example, if the market goes up, the range will only be expanded if there are enough reasons to continue buying.
As the range narrows, some might interpret this as a signal of decreasing interest in following the original move. It would be plausible that the trend is about to change direction.
The second way to apply ATR
Because it measures market volatility, you can also use the ATR as a tool to evaluate your stop and limit positions, as well as to determine position sizing. These applications are more popular today than being used as a trading signal.