Average True Range ATR Definition Forexpedia by Babypips com

23 Mayıs 2025 tarihinde gönderilmiş ultrabet tarafından

Technically, the Average True Range (ATR) indicator is a technical analysis tool that differs significantly in functionality compared to many others. While many indicators analyze the direction and volume of price action, the ATR evaluates the volatility. It is, therefore, among the most popular indicators, especially for day traders, and those looking to trade options trading strategies. Both ADX and ATR are essential indicators for traders, but they serve different purposes. ADX is primarily used to measure the strength of a trend, while ATR focuses on market volatility.

Determining potential trend reversal points

But for the average trader, knowing the relationship between candle size (range) and the ATR value is sufficient. Low values of the indicator are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. The ATR is commonly used as an exit method that can be applied no matter how the entry decision is made. One popular technique is known as the “chandelier exit” and was developed by Chuck LeBeau. The chandelier exit places a trailing stop under the highest high the stock has reached since you entered the trade.

As a hypothetical example, assume the first value of a five-day ATR is calculated at 1.41, and the sixth day has a true range of 1.09. The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one and then adding the true range for the current period to the product. A low ATR value indicates that price movements are limited to a narrow range and volatility is low. This may suggest a period of consolidation or uncertainty in the market. The higher the ATR, the more volatile the market, while a lower ATR suggests more stable conditions. This comprehensive guide explains how to use the ATR indicator in forex, covering its definition, calculations, practical applications, and strategies for trading with it.

If you want to ride massive trends in the markets, you must use a trailing stop loss on your trades.
The reason behind this ATR volatility phenomenon is given by the fear factor.
Nevertheless, it’s worth mentioning as some may need them for developing their trading strategies.
The stock closed the day again with an average volatility (ATR) of $1.18.
It is widely used in forex trading and other venues because of its usefulness, but it should never be used by itself.

ATR indicator explained in a simple and practical way

The ATR is often used to set stop-loss levels and determine the size of a position. However, it can also be used to identify potential breakout opportunities. The ATR technical indicator is a key tool for traders looking to understand volatility patterns in Forex atr a particular market and make informed trading decisions.

The ATR technical analysis indicator is primarily used for applying risk management to your trades. It is also useful for determining position sizes for trade entries. This section examines two significant ways to apply ATR to your trading strategy. The Average True Range (ATR) is a technical analysis indicator used to measure volatility in financial markets. Welles Wilder Jr., this indicator is particularly useful in volatile markets such as Forex, commodities, and stock CFDs to determine the strength and level of price fluctuations.

The average calculation is done using an Exponential Moving Average on the values. There are several different class of indicators that a trader can utilize. And based on the specific goal, such indicators can help in the overall decision-making process.

What is the Average True Range (ATR) Indicator?

Note that there is no mechanical way to know what multiple of the ATR to use, as this would depend on the trading strategy being traded. However, with constant backtesting and the use of your trading strategy, you’ll find what works for you. For instance, if you are trading a very volatile instrument indicated by a huge ATR value, reduce the amount you invest to avoid excessive losses.

This article represents the opinion of the Companies operating under the FXOpen brand only.
The Average True Range indicator is a technical analysis tool that measures the variability, fickleness, and volatility of market price movements.
If the price breaks up and is accompanied by a break higher in volatility, there is a high probability of the market moving in the same direction.
It provides a more accurate representation of market volatility compared to simply using the difference between high and low prices.
In the chart presented below, additional annotations have been added to our previous example, along with the addition of an RSI indicator below the ATR.

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High values suggest that stops be wider, as well as entry points, to prevent having the market move quickly against you. With a percentage of the ATR reading, the trader can effectively act with orders involving proportionate sizing levels customised for the currency at hand. Welles Wilder developed the “Average True Range” or “ATR” indicator to measure the volatility of price changes, initially for the commodities market where volatility is more prevalent. Traders rarely use the indicator to discern future price movement directions but use it to gain a perception of what recent historical volatility is to prepare an execution plan for trading. Setting stops and entry points at beneficial levels to prevent being stopped out or whipsawed are seen as benefits of this indicator.

ADX vs ATR

However, remember that ATR reacts slower to price moves when the period gets longer. Notice that the ATR line breaks the middle level and shifts into the upper half of the indicator. Later, the price breaks the range through the upper level, giving us a long signal. The ATR line is in the lower half of the indicator at this moment. Therefore, you could buy the GBP/USD with the initial idea that you will pursue the minimum target of the pattern equal to the size of the range.

Welles Wilder Jr. and introduced in his book, “New Concepts in Technical Trading Systems” in 1978. The ATR is calculated using a formula that takes into account the price range of an asset over a given period. The indicator measures volatility, rather than price direction, and provides traders with valuable insights into market conditions.

Identifying Volatility Breakouts

Simply knowing the volatility of the last day or the last hour, doesn’t provide us with enough data to be able to make an informed decision. This is why the ATR indicator determines and plots the average of a specific number of sessions. The ATR breakout strategy involves identifying periods of low volatility and anticipating a breakout when volatility expands. Traders can use the ATR to determine the range within which the price has been trading and set a threshold for a breakout. When the price breaks above or below this threshold, it is considered a signal to enter a trade. The ATR indicator meaning tells us how much the price has changed in a current period compared with previous periods.

The STOCHASTIC confirmed the strong bearish trend strength and it dropped below the 20 line. This time, however, the candlestick wicks were much larger during the bearish trend and the trend was not as orderly as in the previous bullish trend. In the screenshot below, the ATR and the STOCHASTIC indicator are used to show the difference between momentum and volatility. Whereas the ATR is used to measure volatility, the STOCHASTIC is a pure trend strength indicator.

Otherwise, you may wish to increase your trading position size if the ATR value is small. This reflects the price gap from the previous close to the current low (L-Cp). The most common period setting is 14, as suggested by the creator of the ATR, J. Welles Wilder Jr. However, shorter periods like 7 or 10 can be used for more responsive, short-term trading, while longer periods like 20 or 50 can be used for a smoother, long-term perspective.

This strategy is based on the concept of volatility and aims to capture strong price movements. Experienced traders are aware that markets move from periods of low volatility to high volatility and back again constantly. As such, the ATR is an invaluable trading tool for those that can appreciate this ebb and flow within the market.

Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! One of the most common applications of ATR is to determine the position of stop-loss orders.