The ATR was initially developed by J. Welles Wilder, who originally designed it for the commodity markets, but Forex traders also use it extensively. The ATR for Forex market is an absolute must for any intraday trader but unfortunately many traders neglect it. It is a big mistake.
To properly calculate the ATR we always need to take into account the previous day’s close as well as the current high and low.
The true range has been defined as the distance :
- Between the current high and the current low
- Between the previous close and the current high
- The previous close and the current low.
When he calculated the average of this value over several days he got an accurate representation of volatility. That is when the Average True Range was born. By improving the ATR indicator he managed to measure volatility.
The ATR Formula
The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one, and then adding the true range for the current period to the product. Next, divide the sum by the selected timeframe.
The ATR has been one of the integrated indicators on the MT4. However, at ECS we have our custom indicator ecs.ATR-pro. First, let me explain the default MT4 indicator.
The tops and bottoms on the ATR window show more volatile trading times and when the ATR is dropping it indicates less volatile periods.
If you move the cursor on the line chart will give you the exact value of the ATR now. So with the default indicator, you can measure the volatility in markets. That being said it is also useful for stop loss placements which I will explain with the ecs.ATR-pro indicator. As the ATR does not measure the direction and simply considers the magnitude of range, it has limited utility as a means for generating trading signals. But it is a handy tool for giving an idea about tops and bottoms of the market move, especially for intraday movement. This, helps us in turn, about position sizing, take profit and stop loss placement.
The indicator clearly prints out different ATR pivot points with the projected tops and bottoms. The top left corner shows today’s trading range along with the given number of days for the average range.
Being an invaluable tool for determining price projections, and overextended price movement the indicator indicates the normal range of the day, which allows traders to avoid wrong entries and capture smart exits.
For intraday trading, I use the setting of 5. We have identified the biggest problem with intraday trading. That is – when to actually exit a trade. With the ecs.ATR-pro the problem is solved.
Source: ecs.ATR-pro indicator
You can see how we use ATR pivots as targets. Usually, we don’t put TP above indicated tops and bottoms. This is a MUST for intraday traders.
The bigger the ATR number for the last 5 days – the more volatile the market is. When you place it on the chart, you will see the difference between the EUR/USD and the GBP/JPY easily.
Source: ecs.ATR-pro indicator
Dotted lines represent projected tops and bottoms. When they are overshot (when a pair moves above or below the projected targets) a yellow line appears. It usually means we can look for counter-trend trading opportunities.
The difference between EliteCurrenSea’s indicator and the default MT4 indicator is big. Main differences are:
- Clearly shown projected top and the bottom
- All ATR pivots displayed
- Visual and numerical display for easier chart reading
- Color coded for the better confluence with other pivot points
- Each day an accurate projected range is printed out
Cheers and safe trading,