The Daily Average True Range indicator was developed by J. Welles Wilder Jr. in 1978 and is commonly used in the forex market as a measure of volatility.
What is the Daily ATR Indicator?
The Daily ATR Indicator is a technical analysis tool that measures the volatility of a currency pair by calculating the average range of price movement over a given period of time. It is often used by traders to identify potential entry and exit points in the market.
The Average True Range measures the volatility of a currency pair by calculating the average range of price movement over a given period of time. The period for which ATR is calculated can be intraday, daily, weekly, or monthly, and it is typically based on 14 periods.
To calculate the ATR, a series of true ranges must be determined first. The true range is the maximum of the absolute values of the following:
- The difference between the current high and current low.
- The difference between the current low and the previous close.
- The difference between the current high and the previous close.
Once the true ranges have been established, an average is taken for the recorded values of each period, using 14 periods. This gives the value of the average true range. The initial 14-period average true range value is calculated using the method described above. Subsequent 14-period average true ranges are calculated using the following formula:
Current Average True Range = [Prior Average True Range * 13 + Current True Range] / 14
When plotted, the readings of the ATR indicator form a continuous line that shows the change in volatility over time. Traders can use this information to identify potential entry and exit points in the market, and also to confirm market trends. The ATR indicator is a versatile tool that can be used on any time frame but is most commonly used on daily charts.
Key Features of the Daily ATR Indicator
- The ATR indicator is a measure of volatility, not a directional indicator.
- The ATR indicator can be used in conjunction with other technical indicators to confirm market trends and potential entry/exit points.
- The ATR indicator can be used on any time frame but is most commonly used on daily charts.
Daily ATR Strategy
Buy Signal
- When a forex asset surpasses any of the ATR levels, it indicates a higher volatility in the prices, An upward move past the red levels signifies a high level of buying pressure for that day.
Sell Signal
- When a forex asset surpasses any of the ATR levels, it indicates a higher volatility in the prices. A downward move past the yellow levels implies that there is a significant amount of selling pressure for that day.
Daily ATR Indicator Pros & Cons
Pros
- The ATR indicator can help traders identify potential entry and exit points in the market.
- The ATR indicator can be used on any time frame, making it versatile for different trading strategies.
- The ATR indicator is a simple and easy-to-use tool for measuring volatility.
Cons
- The ATR indicator does not provide information on market direction, only volatility.
- The ATR indicator should be used in conjunction with other technical indicators to confirm potential trade signals.
- The ATR indicator may not be as effective in markets with low volatility.
Conclusion
The Daily ATR Indicator is a useful tool for assessing the volatility of currency pairs in the foreign exchange market. it is frequently employed to identify potential entry and exit points for trades. Although it does not provide directional signals by itself, it can be combined with other technical indicators to confirm market trends. The ATR indicator can be applied to any time frame, but it is mostly used in daily charts. Its values are usually calculated based on 14 periods, which can be weekly, daily, or even intraday. A high ATR value signifies high market volatility, while a low value signifies low price variation.
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