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Technical indicator the Average True Range (Average True Range, ATR) is a measure of market volatility. It was introduced by Welles Wilder in his book "New concepts in technical trading systems" and since then the indicator is applied as a component of many other indicators and trading systems. This is a very popular indicator included in most programs for the analysis of markets. Its main purpose is setting the correct Stop Loss levels. It is the most effective method for setting stops , which proves the statistics.
Average True Range is also used as a trend filter. It can be interpreted by the same rules as other volatility indicators. The principle of prediction using the ATR is that the higher the indicator value, the higher the probability of a trend change; the lower the value, the weaker the trend. A detailed review of the indicator in the current material.
the Characteristics of the indicator
Currency pairs: Any
Timeframe: any H1 and higher
trading Time: around the clock
indicator Type: oscillator
Recommended broker: Alpari, Exness
True range (True Range) is the greatest of the following three values:
the difference between the current high and low;
the difference between the previous closing price and the current high;
the difference between the previous closing price and the current low.
True Range = Max(High-Low; High — Close; Close-Low)
the Indicator Average True Range (Average True Range) is a moving average of true range:
ATR = SMA(TR,N), where TR – true range, N is the averaging period, SMA – simple moving average.
settings for the ATR indicator is available only to the averaging period, which defaults to 14.
the Use of ATR as a filter
ATR can be used as a trend filter. For this you need to plot the ATR midline. In its breakdown of some of the most significant price movements. The indicator, there can be negative values and a specific midline too. She is chosen by eye for each market separately. Suggest as a median line to overlay on the chart the ATR moving average of a long period. While ATR is below its moving average, the movement is insignificant and the market is calm. The breakdown of ATR, middle, and bottom-up starts a trend. In addition, some traders recommend to use the indicator on multiple TF as H1 and D1. If their directions aligned and on a smaller TF the indicator crosses its median line, the market rallied. Once again, set ATR and median line for each market and each TF separately.
works Fine ATR14 and MA100 as a median line to determine the time of trading trading systems based on the principle of mean reversion. Also very good shows itself the Envelopes indicator (240) is applied to the values of the ATR — ATR while lower Envelopes, the volatility is low, after the breakdown of the channel up possible sharp volatile movement. Also ATR is often used to determine the average length of the candle. For example, if the current ATR reading more than, say, 20, or conversely, less than 10, the trade entry is skipped. It's all quite logical – if the current market is too small candles, then the potential for profit is small. If the candle is too large, it is likely that the market is experiencing some extreme events like the release of important economic news. And as we all know, during news release market is very volatile and the future direction of movement of the tool is poorly projected.
the Use of ATR for exit
ATR is often used for the installation of adaptive stop loss, both of fixed and floating (trailing stop). The idea of setting stops based on volatility personally, I like and I often use this option for trailing stop. As a rule, to calculate the required size of the stop order, the value of the indicator is multiplied by a certain constant that depends on the theoretical duration of the future transaction. For the time plots, for example, you can take the constant equal to 2-4. That is, for example, for trades on the EURUSD if ATR=0,0062 on chasovike we 6,2 multiplied by a constant, such as 3 and our stop is approximately 18 — 19 points.
it is Much more convenient (and I think it is quite right and logical) to use ATR for trailing stop. In this case the value of the trailing stop automatically adjusts to the current market volatility. For example, we have entered into the deal, have accumulated a certain profit on the position and at a predetermined distance tral began to catch up to the price. Price, in turn, began a sharp movement in the right direction. The trawl in this case is kept at quite a distance, giving the market the opportunity to move on. Then the movement begins and ends flat. ATR respectively falls, and our getting shorter trailing stop moves closer to price. As you know, after periods of strong trend occurs as flat, after which the price again sharply starts to move, and not necessarily in our direction. In case of reversal after a period of flat trading we will lose a bit — our stop is tucked up close enough to the price. In case of continuation pattern will happen again and again until activation, in the end, our stop order.
the Filter volatility for programmers
And as a bonus for those who know how (or learn) to program, I decided to post my version of the function prohibiting trade with high volatility.
extern bool UseATRFilter = true;
extern int ATRPer = 14;
extern int EnvPer = 240;
input ENUM_MA_METHOD EnvMode = MODE_EMA;
extern double EnvDev = 10;
, double ATR;
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