The indicator ATR (average actual range) was first introduced in 1978. Its popularity is high and is included in all popular modern platforms.
It is from group of oscillators. The principle of all oscillators comes from physics. Mostly simple, it is a system that a change in its equilibrium state is experiencing strength and restoring it at the original balance.
Average true range measured volatility within a specified period (the default is set to 14 periods). Reaches high values strong volatility and a decline in volatility - declined to minimum values. The sensitivity may be reduced (especially when highly volatile instruments) by increasing the period. Traders mostly use ATR for further analysis tool according to current levels of volatility relative to the historical average volatility registered. For example, if we ATR = 0,0015 we will know that the average candle for the selected period is 15 points (0.0015 x 10 000 = 15). From this information we can determine that must put a stop not less than 15 points, the stop must be there because the probability of being hit by noise is very high within the range of ATR, while outside it drops sharply.
It was found that the light is highly cyclical. When it visibly alternate cycle of rise and fall cycle. Many traders combine local maximum of the likelihood ATR price is also reached local limit. In this case, they suggest correction and close short positions, with the intention of better price and a new entrance for the adjustment. Some risk traders placed in such a situation combined order backlog for the long and short, expecting strong movement.
High performance of the ATR are typical cases of mass panic sales. Low values are found most often in horizontal movement at the top and consolidation. It is assumed that the growth of the indicator increases the likelihood of a change of a trend along with the new price pulse; while the decline of the indicator, usually the trend continues. Outlyers show potent activity against price and short. Low values characterize the market as quiet. The price is relatively narrow corridor without violent movements and this is an excellent opportunity for scalpers.
Given the mathematical concept of ATR, do not recommend seeking convergence or divergence with the price, because these effects will be completely random events, although the Internet encountered quite such advice.
There are opinions that the indicator is lagging, but this is typical for most oscillators and their application should in principle be carried out in combination with other indicators. More widely used with trend indicators, but is often used as an addition to the price action signals (internal bar, ingestion, pin bar ...).
An important feature is that ATR is not predicted direction, but only shows an abrupt change in market activity. Used and exit strategies of consolidation. For example - in 10 day consolidation and steady decline in volatility (as measured by ATR), it is believed that a good signal to buy is when input price break the maximum achieved during the period. Again I must emphasize that the indicator only shows the range (size) of the bar, not the direction of the price.
ATR indicator is very popular because it characterizes the volatility of the market and the volatility is one of the basic statistical indicators about the current market situation.
JrTrader G.Hristov
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