In forex, the term ATR stands for Average True Range. ATR is a technical analysis indicator that measures market volatility. This indicator was developed by J. Welles Wilder Jr. in the 1970s. The ATR is a popular tool used by forex traders to determine the level of volatility in the market and to help them manage their risk.
The ATR is a moving average of the true range (TR) of the market. The true range is the greatest of the following: the distance between the high and low of the current period, the distance between the high of the current period and the previous period’s close, or the distance between the low of the current period and the previous period’s close. The ATR is calculated by taking the average of the true ranges over a specified number of periods.
The period used in calculating the ATR is determined by the trader, but the most common period used is 14. This means that the ATR is calculated based on the true ranges of the last 14 periods. The ATR value can range from zero to infinity, with higher values indicating higher volatility.
Traders use the ATR to determine the level of volatility in the market. A high ATR value indicates that there is high volatility in the market and that prices are moving rapidly. This can be an indication of a trend reversal or a breakout from a range. On the other hand, a low ATR value indicates that there is low volatility in the market and that prices are moving slowly. This can be an indication of a range-bound market or a consolidation phase.
The ATR is also used by traders to set their stop-loss orders. The stop-loss order is an order that is placed to limit the trader’s losses if the market moves against them. Traders usually set their stop-loss orders at a level that is a certain number of ATRs away from the entry price. This is because the ATR provides a measure of the average volatility of the market, and setting the stop-loss order at a level that is a certain number of ATRs away from the entry price ensures that the stop-loss order is placed at a level that is appropriate for the current market conditions.
For example, if a trader enters a long position in a currency pair at 1.2000 and sets their stop-loss order at 2 ATRs away from the entry price, the stop-loss order would be placed at 1.1960 (1.2000 – (2 x ATR)). If the ATR value is 20 pips, then the stop-loss order would be placed at 1.1960 (1.2000 – (2 x 20)).
In conclusion, the ATR is a useful tool for forex traders to determine the level of volatility in the market and to set their stop-loss orders. The ATR provides a measure of the average volatility of the market and can help traders manage their risk effectively. Traders should be aware that the ATR is not a directional indicator and should be used in conjunction with other technical analysis tools to make trading decisions.
