The Average True Range (ATR) is a technical indicator used to measure the volatility of a financial instrument. It was developed by J. Welles Wilder Jr. in 1978 and is widely used by traders to identify market trends, assess risk levels, and determine entry and exit points. In essence, the ATR is a moving average of the true range of an asset over a specific period of time. In this article, we will explain how to take the average of ATR forex.
What is ATR?
Before we delve into how to take the average of ATR forex, it is important to have a basic understanding of what ATR is. As mentioned earlier, ATR stands for Average True Range, which is a measure of volatility. The true range is the difference between the high and low of a financial instrument over a specific period of time. The ATR takes into account not only the daily price range but also gaps in price between one day and the next.
The ATR is calculated using a moving average of the true range over a specific period of time. The most common time frame used for ATR is 14 days, but it can be adjusted to suit the trader’s needs. The ATR value is expressed in the same currency as the financial instrument being analyzed (e.g., dollars for USD/JPY).
How to calculate ATR?
To calculate ATR, you need to follow these steps:
Step 1: Calculate the true range for each day.
True range = Maximum of (High – Low), (High – Previous Close), or (Previous Close – Low)
Step 2: Calculate the average true range over a specific period of time.
ATR = Moving Average of True Range over a specific period of time
For example, if you are using a 14-day ATR, you would add up the true range values for the last 14 days and divide by 14.
How to take the average of ATR forex?
To take the average of ATR forex, you need to follow these steps:
Step 1: Calculate the ATR for each currency pair.
Calculate the ATR value for each currency pair you are interested in trading. You can use any time frame you prefer, but it is recommended to use a longer time frame for more accurate results.
Step 2: Add up the ATR values.
Add up the ATR values for each currency pair.
Step 3: Divide by the number of currency pairs.
Divide the total ATR value by the number of currency pairs you are analyzing. For example, if you are analyzing four currency pairs, you would divide the total ATR value by four.
Step 4: Use the average ATR value to determine position size.
The average ATR value can be used to determine the appropriate position size for each trade. The position size should be based on the trader’s risk tolerance and the volatility of the market. A higher ATR value indicates a more volatile market, which may require a smaller position size to manage risk.
Conclusion
In conclusion, the ATR is a useful technical indicator for measuring the volatility of a financial instrument. It is calculated using a moving average of the true range, which takes into account gaps in price between one day and the next. To take the average of ATR forex, you need to calculate the ATR value for each currency pair, add up the values, divide by the number of currency pairs, and use the average ATR value to determine position size. By using the ATR, traders can better manage risk and make more informed trading decisions.
