There are many indicators used in the currency market, just one such popular one is ATR or the Average True Range indicator. This was first developed by J. Welles Wilder in order to calculate the volatility of fluctuations in prices. This found initial use in the commodity market where the volatility is very high, but gradually the same has found widespread utility in the currency market as well.
Most traders will not use this indicator to discriminate the price movement direction for the future, but will use it to get a perception of what the volatility curve showed recently. This thus helps in creating a plan for Forex trading that can be executed. The most visible benefits of this indicator are setting the stops and entry points at advantageous levels to prevent being stopped out or whipsawed.
The ATR is most commonly distinguished as an oscillator, since the curve that is created swings between the calculated values that is based on the price volatility level for the selected time duration. This indicator does not give any information related to the price direction.
The high values for this curve show that the stop and entry points would be wider and this can prevent the trader to move quickly before the market turns against them. The percentage of ATR reading can help the trader in acting effectively with orders that involve proportionate size levels tailored for the currencies in hand.
Formula used for ATR
Commonly used in MT4 Trading software, the calculation involves the following steps:
• For every chosen periods, three values are calculated- first is the high minus the low, second is the high minus the close for the previous period and the third is the close for previous period minus the low
• The true range is the highest of the three past calculations
• ATR describes the moving average for a chosen length of period, which is typically set as 14.
There are many software programs available that perform the computational work and automatically produce an ATR indicator that is displayed in the form of charts in different colors.