The Average True Range indicator (ATR) is used for measuring market volatility. ATR forex indicator was introduced by Welles Wilder who described it in his book “New Concepts in Technical Trading Systems”. Since then, the ATR forex indicator has been applied as a part of other trading systems.
The Average True Range indicator often reaches peaks at the bottoms after prices fall sharply on the back of massive sell-offs. Low readings of the indicator correspond to continuous periods of horizontal moves that are seen at peaks and during consolidation. ATR can be interpreted in the same way as other volatility indicators. To make an accurate forecast based on ATR trading, one should stick to the following principles: the higher the reading, the higher the possibility of trend reversal; the lower the reading, the weaker the trend momentum.
True Range is the biggest value among these three variables:
- difference between the current high and low;
- difference between the previous closing price and the current high;
- difference between the previous closing price and the current low.
What is ATR in simple words? It is the moving average of the readings within the true range.