One of the most progressive technical trader J.W.wilder, developed ATR to measure futures volatility. When applied on forex, ATR can help technical trader to increase profitability of his forex trading strategy.
Anatomy of Average true range forex (ATR) forex indicator
Volatility is difference between high and low of price in a chosen time period. Wilder designed this forex indicator based on observation, that on market, periods of low volatility are followed by periods of high volatility . By comparing current volatility to the average of previous candles (10 day candles by default) we can effectively enter the market at breakouts.
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ATR is based on exponential moving average (14) applied on true range. As such it gives fewer and more accurate signals.
TrueRange = Current High – Current Low
TrueRange = Current High – Previous candle close
TruRange = Previous candle close – Current low
Using Average true range forex (ATR) forex indicator
Calculating market volatility on candle. ATR works best on daily range (candle), however it can be also used on lower timeframes. ATR forex indicator is very useful in anticipating and reacting to marketbreakouts. To be able to compare heightened volatility of breakout to previous data, we can apply moving averages to ATR window.