Average True Range (ATR)

J.Welles Wilder

Developed by J. Welles Wilder, Average True Range (ATR) is a popular volatility indicator used to measure the volatility in currency pairs.

ATR does not provide any information about the direction of the trend (up or down), it only provides useful info about how volatile a currency pair is.

A high volatile pair such as the GBP/JPY will have a high ATR while a low volatile pair, for example the EUR/GBP will have a low Average True Range.

ATR Calculation

True range(TR) is the largest of these three prices:

The difference of Today's High Price – Today's Low Price
The difference of Today's High Price – Yesterday's Close Price
The difference of Yesterday's Close Price – Today's Low Price

ATR Formula (14 days calculation)

ATR current = 13/14(ATR Previous) + 1/14 (TR current)

ATR is a moving average of values of the TR range.

Recommended period

14 days (standard on most forex charting software)

Trading signals from ATR

Forecasting currency pair movements with ATR is based on the same principle as other volatility indicators: the higher the value of ATR, the higher the probability of a change in trend (looking for tops and bottoms); the lower the ATR ’s value, the weaker (sideways or slow trending) the trend’s movement is, we're now looking for possible breakouts.

Suggested further reading

Stop Placement with Average True Range (ATR)

PS. It is recommended to use Average True Range (ATR) in conjunction with other technical analysis tools to make a complete forex trading system.