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The Average True Range (ATR)
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it is an indicator of technical analysis that works as a measure of volatility. It was introduced, along with many other technical analysis tools, by Welles Wilder in his book "New Concepts in Technical Trading Systems". At the moment ATR is one of the most commonly used technical analysis indicators, has stood the test of time and has made its way onto many trading platforms.
The ATR indicator as displayed on the IQ Option trading platform
How does it work?
Although it might seem otherwise, the idea behind the indicator is simple. Currency exchange rates always fluctuate. High volatility is one of the reasons why millions of traders around the world love the Forex market. The higher the volatility, the greater the number of potentially profitable operations. Trading opportunities come with volatility. Obviously the direction of the future trend is important, but knowing that a trend is about to begin is already extremely useful. Moreover, if the volatility is high enough, in some strategies it is not even necessary to know the exact direction of the trend. There are several ways to estimate market volatility and ATR uses one of these.
To understand how ATR works you must first take a look at the concept of "true range". According to Wilder, the "true range" is the largest of the following:
- Current Maximum less current Minimum,
- Current Maximum minus the previous Closing value,
- Current Minimum minus the previous Closing value.
For the last two points absolute values are used to guarantee positive numbers.
The "true range" is the largest of these three parameters
Average True Range is a moving average of the "true ranges" mentioned above. By default, a moving average of period 14 is used. The entire indicator is represented by a single line. When the volatility is rising, the ATR chart will go up. Otherwise, when the market is stable, the line will gravitate downwards.
How to set it up?
Setting the ATR indicator on the IQ Option platform is easy.
Click on the "Indicators" button in the lower left corner of the screen. Then choose ATR from the list of available indicators.
Set the indicator. Step one
Then click on the "Apply" button. The indicator appears at the bottom of the screen, just below the price chart.
Set the indicator. Step two
Average True Range is ready to be used.
How to use it in trading?
The indicator can be used by investors to determine optimal entry and exit points.
Usually periods of low volatility are mixed with periods of high volatility, when the market is unstable, thus creating numerous trading opportunities. The changing nature of the Forex market is what makes it so tempting. Knowing when the period of low volatility (and therefore of limited trading options) is about to end is a strategic advantage that traders can wait to use.
Periods of low volatility are interspersed with periods of high volatility
The longer the ATR period, the more precise the indicator will be, compromising part of the trading signals. And vice versa, reducing the number of periods you can get more signals, but it is likely that some of them will be false or at least not as precise as you want.
Important note. ATR uses absolute values instead of percentage variations. Indicators of different societies and even of the same society on different time intervals can not be adequately compared to each other.
Conclusions
Average True Range is not an indicator that can show the future direction of the trend or provide complete information on how the price graph will behave. However, the ATR is a unique indicator as it helps to track the volatility of price action. Combined with trend-following and momentum technical analysis tools, ATR can represent a reputable tool with good potential.
This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.
GENERAL INFORMATION ON RISKS:
CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.
Any reference to price movements or historical levels is to be considered purely informative and is based on external analyzes, we do not guarantee that these movements or levels are likely to resurface in the future.
Source: IQOption blog 2018-10-15 12:45:31
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