The Average True Range (ATR) is a popular technical analysis indicator used in forex trading to measure volatility. It helps traders to determine the degree of price movement in a particular currency pair, enabling them to make informed trading decisions. ATR is a versatile tool that can be used in combination with other indicators to determine entry and exit points, as well as stop-loss levels. In this article, we will explain how to calculate average true range forex.
What is Average True Range (ATR)?
ATR is a technical analysis indicator that was developed by J. Welles Wilder Jr. in 1978. It measures the degree of price movement in a particular currency pair over a specified period. ATR takes into account the high, low, and closing prices of a currency pair to determine its volatility.
ATR is calculated using a moving average of the true range of a currency pair. The true range is the greatest of the following:
1. The difference between the high and low prices of the current period
2. The difference between the high price of the current period and the closing price of the previous period
3. The difference between the low price of the current period and the closing price of the previous period
The formula for calculating ATR is as follows:
ATR = (TR1 + TR2 + TR3 + … + TRn) / n
Where:
TR = True Range
n = Number of periods
How to Calculate Average True Range Forex
To calculate ATR for forex, you need to follow these simple steps:
Step 1: Choose a time period
The first step is to choose a time period for which you want to calculate ATR. The time period can be a day, week, or month, depending on your trading strategy and the currency pair you are trading.
Step 2: Calculate the true range
Next, you need to calculate the true range for each period. To do this, you need to identify the high, low, and closing prices of the currency pair for each period.
For example, let’s say you want to calculate ATR for a currency pair over a period of 14 days. The true range for the first day would be calculated as follows:
True Range Day 1 = High – Low
The true range for the second day would be calculated as follows:
True Range Day 2 = max(High – Low, Abs(High – Close Previous), Abs(Low – Close Previous))
Where:
High = High price of the current period
Low = Low price of the current period
Close Previous = Closing price of the previous period
max = Maximum value
Abs = Absolute value
You would continue to calculate the true range for each day using the above formula.
Step 3: Calculate the average true range
Finally, you need to calculate the average true range for the specified time period. To do this, you need to add up all the true ranges for the specified time period and divide by the number of periods.
For example, if you want to calculate ATR for a currency pair over a period of 14 days, you would add up the true ranges for each day and divide by 14.
ATR = (TR1 + TR2 + TR3 + … + TR14) / 14
Where:
TR = True Range
Using ATR in Forex Trading
ATR is a versatile tool that can be used in forex trading in many ways. Here are a few ways you can use ATR in your trading strategy:
1. Determine stop-loss levels: ATR can be used to determine stop-loss levels by setting them at a certain multiple of ATR. For example, if ATR is 0.0025, you may set your stop-loss at 2.5 times ATR, which would be 0.00625.
2. Determine entry and exit points: ATR can help you determine entry and exit points by identifying when the market is experiencing high volatility. When ATR is high, you may enter or exit a trade, as the market is likely to move significantly in one direction.
3. Identify trend reversals: ATR can help you identify trend reversals by indicating when the market is experiencing low volatility. When ATR is low, it may indicate that the market is consolidating and preparing for a trend reversal.
Conclusion
ATR is a powerful technical analysis indicator that can be used in forex trading to measure volatility. It helps traders to determine the degree of price movement in a particular currency pair, enabling them to make informed trading decisions. By following the steps outlined in this article, you can calculate ATR for forex and use it in combination with other indicators to improve your trading strategy.
