ATR Indicator Forex

ATR indicator Forex which was developed by Welles Wilder Jr. and described in his book New Concepts in Technical Trading Systems.

Formula

Trading use

ATR Histogram is a relevant indicator of market volatility which points out the periods of growth and slowdown of price movements. This instrument is based on classical ATR indicator and is better used for volatility estimation rather than common analysis.

Price volatility is a gauge for price fluctuation over a certain period of time. This indicator is not good for completing operations as it does not show the periods of price growth or decline as well as convergence and divergence signals.

In case of strong price fluctuations, volatility will accelerate while the weakening of price changes will confirm lower volatility. Despite ATR Histogram cannot be referred to trading indicators, it can be successfully used in decision making on financial markets.

Low volatility is indicative of downturn in price changes. Taking into account that volatility is cyclic, the decline will be followed by the rise which will be expressed in the form of stronger price fluctuations.

In other words, traders who favor breakthrough strategies can use volatility for their analysis: if the signal for breakout of support/resistance level is formed when volatility is low, the following growth of indicator showing the strength of price changes will affirm that trend is gaining momentum and breakout signal will be supported by increasing price flow.

Moreover, volatility is an optimal indicator for stop loss orders placement. To calculate it, use three readings of current volatility on operational time frame (volatility is marked in points, current volatility level is equal to the height of histogram bar) and add spread if available.

The given stop loss order is perfect for the majority of trading operations, especially when countertrend strategies are used by which the price does not go far from its opening position.