Average True Range (ATR) – How to trade with ATR?
Totally we can divide Technical indicators into 3 different categories:
Trend-following indicators: (some example)
I. Moving averages (both simple and exponential),
II. MACD (Moving Average Convergence Divergence),
III. Parabolic SAR,
IV. ADX (Average Directional Movement Index)
Momentum indicators: (some example)
I. Relative Strength Index (RSI),
III. Commodity Channel Index (CCI)
Volatility indicators : (some example)
I. Bollinger Bands and
II. ATR (Average True Range)
Average True Range (ATR) – General information
J. Welles Wilder developed this Volatility indicator for commodities, however, it is totally fine to use it for all kinds of symbols. The average true range (ATR) is calculation the market volatility based on specific period days and traders can change it based on their trading strategies which Mr. Wilder as a developer of ATR recommended 14 days period time. In this indicator, you can see the line and a number, what is important here is the number as an average range of market movement, so to use you can avoid looking at the line and just check the numbers.
ATR is displayed with a decimal to indicate the number of pips between the period highs and lows. The bigger number reads as more changes in the market and vice versa for less number, which it means if you are trading with symbols with a bigger number of ATR have to stet up bigger SL and when the market has fewer changes can use a smaller number for SL and TP as well. As ATR has a smaller number means the risk of the market is less and potential profit also will be less, so reading ATR number accurately will help you to manage your risk in the market by choosing the right symbol to trade with if you are looking for a less risky market. As you can see below, technically this is the way how this indicator works, however today we will talk about how we can use it and not going into mathematics calculation.
ATR shows the volatility of the market movement/price action