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What is average true range in forex?

Average True Range (ATR) is a technical analysis indicator used to measure volatility in financial markets, including forex trading. The indicator was developed by J. Welles Wilder and was first introduced in his book, “New Concepts in Technical Trading Systems.” ATR measures the average range of price movement in a given time period, taking into account any gaps that occur.

ATR is calculated using the true range, which is the greatest of the following three values:

1. Current High minus the Current Low

2. Absolute value of Current High minus the previous Close

3. Absolute value of Current Low minus the previous Close

The ATR is then calculated as the moving average of the true range over a specified time period. The most commonly used time period is 14, but traders can adjust this value to suit their trading style and market conditions.

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The ATR indicator is displayed as a line on a chart, and its value is expressed in the same units as the price. For example, if the price of a currency pair is quoted in pips, the ATR will also be in pips.

The ATR indicator is useful for forex traders because it provides a measure of the volatility of a currency pair. Volatility is an important consideration for traders because it affects the potential profit and risk of a trade. Highly volatile currency pairs can offer greater profit potential, but they also come with a higher level of risk.

Traders can use the ATR indicator in several ways. One common strategy is to use the ATR to set stop-loss and take-profit levels for a trade. For example, a trader may set a stop-loss level at two times the ATR value below the entry price, and a take-profit level at two times the ATR value above the entry price. This strategy takes into account the volatility of the currency pair and aims to limit the potential loss while maximizing the potential profit.

Another way to use the ATR indicator is to identify potential breakouts in the market. When the ATR is low, it suggests that the market is in a period of low volatility and may be consolidating. When the ATR is high, it suggests that the market is experiencing a period of high volatility and may be preparing for a breakout. Traders can use this information to look for trading opportunities, such as entering a trade when the price breaks out of a consolidation range.

The ATR indicator can also be used to compare the volatility of different currency pairs. Traders can use the ATR value to compare the volatility of different currency pairs and choose the ones that best suit their trading style and risk tolerance.

In conclusion, the Average True Range (ATR) is a useful technical analysis indicator for forex traders. It measures the volatility of a currency pair and can be used to set stop-loss and take-profit levels, identify potential breakouts, and compare the volatility of different currency pairs. Traders should always use the ATR in conjunction with other technical indicators and fundamental analysis to make informed trading decisions.

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