The Average True Range is an indicator used for determining the volatility of a pair in the Forex market.
The ATR is used for technical analysis is other markets too such as stocks, options, and futures. What the ATR does is simple. It measures the range of price movement for a specific price period.
History of the ATR
The ATR was developed by J. Welles Wilder. He started with the concept called True Range.
The true range is the greatest of these three calculations.
A. current high – the current low
B. current high – the previous close
C. current low – the previous close
The greatest of these three calculations is used to determine the True Range (TR).
The ATR Calculations
The ATR is the “Average True Range”. Essentially the ATR is the average of a specified number of period’s ATR. If you are using a 14 period ATR. The ATR will be the average of the past 14 period’s TRs (True Ranges).
As illustrated in the picture above, the ATR indicates volatility. When there is a lot of volatility, the ATR is high. When there is little volatility, the ATR is low.
The chart above is a daily EUR/USD chart and volatility is a little lower recently. You can tell by seeing it has been ranging more than trending.
There reasons for a low ATR and low volatility could be many. The current situation with the EUR/USD is this: good news for the Euro and for the USD has been common recently, almost balancing each other out.
Along with positive news releases, there is a lot of uncertainty with the Euro and the USD. The Euro is currently going experiences severe issues with Spain and Greece and leaders want to see more fiscal union. The USD recently passed QE3 and the U.S. Presidential Election is taking place next month.
All these things affect Forex market expectations, which affects the amount/direction of the money being traded, which affects volatility, which affects the ATR.
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