Average True Range

Source: Binary Options

There are many volatility oscillators. The most accurate of them is the Average True Range (ATR). The ATR wants to find out how far an average period of an asset has moved in the past, but it uses a more accurate method of calculation than other indicators.

Other indicators use a fixed formula, for example always subtracting the current period’s high from its low. While this method is accurate, it ignores gaps. Sometimes, the market jumps from one price to another, which creates a gap in the market. Momentum indicators that ignore these gaps paint a distorted picture. The ATR’s main advantage is that it recognizes gaps and factors them into its calculation.

For a detailed explanation of the ATR, please read our article on the ATR. For this article, the important point is that the ATR calculates each period’s true range and then creates an exponentially smoothed moving average.

The result tells you the average true range of the last periods. For example, when the ATR has a value of 0.1, you know that an average period has £0.1 in the past. You can use this value to predict the range of future market movements.

You can also interpret the value in relation to previous values.

  • If the value has dropped from £0.2 to £0.1, you know that market is losing energy.
  • If the value has risen from £0.05, you know that the market is picking up steam.

Both trends are likely to continue. They create different situations that require different trading strategies, and the ATR helps you to identify which one is right for now.

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