Average True Range indicator (ATR) is a technical analysis tool that helps measure market volatility. It is one of the most commonly used technical analysis tools that has become an essential part of many trading methods. In this article, you will learn how the ATR indicator may be applied in trading. It also covers the basic ATR indicator settings and ATR technical analysis techniques.
Describe the ATR indicator's operation.
Although the indicator may seem complicated at first, the idea behind ATR is relatively simple. It’s based on volatility – asset price fluctuations. Some traders may look for volatility when searching for trading opportunities. High volatility means that asset price changes more than usual, which some might consider a possible time to enter the market. However, it also involves higher risks.
The Average True Range indicator measures market volatility. There is just one indicator line that shows the average of true ranges over a chosen period of time.
The ATR line will typically increase when volatility is increasing. On the other hand, the line will typically incline toward the bottom when the market remains stable.
Traders using the ATR for technical analysis should keep in mind that it doesn’t show the direction of the trend. It just offers insights into how much the asset price changes during a certain period. To learn about trend direction or to measure the trend strength, you may consider the Ichimoku Cloud or the ADX indicator.
ATR Indicator Settings
The default ATR indicator settings available on the IQ Option platform are often used by traders. You can, however, modify them to suit your preferences or try out various choices.
The default period setting for this instrument is 14 days. Keep in mind that a longer period might offer more precise information about the overall volatility, but it may provide fewer insights into short-term changes. On the other hand, a shorter period for the ATR settings might be useful for detecting smaller, more subtle changes in volatility, but some of them may turn out to be false or not as accurate.
Here are the main steps to apply the ATR indicator settings in the traderoom.
1. Click on the “Indicators” button in the bottom-left corner of the screen and go to the ‘Popular’ tab.
2. Choose the Average True Range indicator from the list of available tools.
3. Apply default settings or adjust them to fit your needs.
4. The indicator will appear in the bottom part of the screen, right below the price chart.
How to use the ATR volatility indicator for trading?
Normally, periods of low volatility alternate with periods of high volatility. Knowing when the period of low volatility (and therefore limited trading options) is about to end may be important for making trading decisions. Therefore, assessing price volatility might be useful in determining optimal entry and exit points.
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If the ATR line reaches higher values and shows signs of a potential reversal or a sideways movement, traders may choose to exit the trade.
To get additional information about the trend and its direction, you may combine the ATR volatility indicator with other technical tools. Remember that no one single indicator can provide 100% accurate data. So using other instruments may help traders receive as much useful data as possible to make an informed decision.
Conclusion
Average True Range is not an indicator that will demonstrate the future trend direction or provide complete information on how the price chart is expected to behave. Nevertheless, ATR is an indicator that is unique in its own way as it helps to track down volatility of the price action. Combined with trend-following and momentum-type technical analysis tools ATR can be a decent instrument with good potential.
