ATR which stands for “Average True Range” is powerful indicators used by many traders to identify the relative volatility of the financial market. To be precise this indicator will signal us when the market is facing high level of volatility. “The higher the volatility of the market the higher will be the value of the ATR indicator.” This indicator is also called as absolute value indicator by many professional trader due to its absolute value.
Let’s see an example ATR indicator
Figure: ATR indicator used for measuring the volatility
The default setting of ATR is14 period. When the value of ATR remains flat it means the volatility is very low in the market. The rising value ATR indicates the rising volatility of the trading instrument. Professional traders use this tools only to measure the volatility and strength of the trend along with potential range of price movement.
The main difference between ATR and other popular indicators like MACD and ADX lies in the detection of price movement. This indicator sole function is to measure the relative volatility of the market compares to price movement. Trader confirms the trend reversal signal first from other indicators and parameter. Then they make a confluence with the ATR for strong reliable signal. “After a long downtrend if a bullish reversal occurs with high value of ATR then it generally represents strong buy signal in the market.”
Similarly, when a key level of support is breach with rising value of ATR trader professional traders enters short with the breakout. “Many professional traders alters the value of the period of ATR to 8 for better result.” Recent studies and research show that this indicator works best with the value 8 only with synthetic pair. Make sure that you use protective stop loss while trading any indicator regardless of its popularity and reliability.