The Average True Range (ATR) is a popular technical indicator that helps traders to measure the volatility of a financial asset. It was developed by J. Welles Wilder in the late 1970s as a tool to assist traders in determining the range of price movement for a given period. The ATR is an oscillator that measures the price range of an asset over a specified period, typically 14 days. In this article, we will explain how to read ATR forex and how it can be used in forex trading.
The ATR is calculated by taking the average of the true range of an asset over a certain period. The true range is defined as the maximum of the following three measures:
1. The difference between the current high and the current low
2. The absolute difference between the current high and the previous close
3. The absolute difference between the current low and the previous close
The ATR is then calculated by taking the average of these values over the specified period.
The ATR is measured in the same units as the price of the asset, and it can be displayed as a line on a chart. The ATR line moves up and down depending on the volatility of the asset. If the ATR line is moving up, it indicates that the volatility of the asset is increasing, while a downward movement of the ATR line indicates a decrease in volatility.
To read the ATR forex, traders need to understand how to interpret the ATR line on the chart. The ATR can be used in several ways, including:
1. Determining Stop Loss and Take Profit levels: Traders can use the ATR to set their Stop Loss and Take Profit levels. The ATR can help traders to determine the level of volatility of an asset and set their Stop Loss and Take Profit levels accordingly. For instance, if the ATR of an asset is 50 pips, traders can set their Stop Loss and Take Profit levels at 100 pips and 150 pips, respectively.
2. Identifying Trend Strength: Traders can use the ATR to identify the strength of a trend. A strong trend will have a high ATR, while a weak trend will have a low ATR. Traders can use this information to determine whether to enter a trade or hold an existing trade.
3. Identifying Breakout Points: Traders can use the ATR to identify breakout points. Breakout points occur when the price of an asset breaks through a significant resistance or support level. Traders can use the ATR to determine the level of volatility of an asset and enter a trade when the ATR is high.
4. Identifying Reversal Points: Traders can use the ATR to identify reversal points. Reversal points occur when the price of an asset changes direction after a significant trend. Traders can use the ATR to determine the level of volatility of an asset and enter a trade when the ATR is low.
In conclusion, the Average True Range (ATR) is a valuable tool for forex traders. It helps traders to measure the volatility of an asset and make informed decisions about their trades. The ATR can be used to determine Stop Loss and Take Profit levels, identify trend strength, breakout points, and reversal points. Traders should learn how to read ATR forex and incorporate it into their trading strategies to improve their chances of success.
