The Average True Range is an indicator of volatility. It was developed by J. Welles Wilder in 1978. As well as the many other indicators, first it was created for the commodity markets, which are more unsteady than shares, and for the prices at the end of day. Nowadays it’s widely used in Forex market, on other periods too.
First Wilder defines the True range, or TR, determined as maximal of the following 3 values: absolute value of a distinction between ongoing maximum and the previous close price; absolute value of a distinction between ongoing minimum and the previous close price; distinction between an ongoing maximum and an ongoing minimum. If the distinction between a maximum and a minimum is rather little, most likely other two aforesaid methods will be used for TR calculation. If the range changes inside of the period, a distinction between a maximum and a minimum, is rather big, most probably TR will calculate from it.
Formula:
ATR = Moving Average (TRj, n), Where TRj = maximal modules from three values |High – Low |, |High – Closej-1 |, |Low – Closej-1 |.
The use
As a rule ATR with 14 periods is used. It’s calculated both on a one-day basis, and on day-time or week and even monthly basis. Extreme values of the indicator often define reversal points or the start of a new fluctuation.
Average True Range can’t predict a duration or direction of changes, as well as other volatility indicators. It specifies only an activity level. The indicator’s low level points out quiet trade in a little range, and high values point out intensive trade in a wide range. The long period of low ATR points out integration which, most probably, will result in fast continuation of changes or a turn.
High values of ATR usually are the result of quick fluctuations and seldom stay like this for the long period. As ATR indicates absolute volatility value currency pairs on Forex with the low prices will have with other things being equal lower ATR and on the opposite. The main notion of this indicator says “the smaller is the indicator’s value the more poor a trend direction is; the higher the indicator’s value is, the higher possibility of a turn of a trend is”.
The weaknesses
During a long period of ATR can be late, specifying not ongoing but previous inconstancy.
