We continue with the series of articles on trading training, where we will teach you the origin and functioning of all types of indicators, how to interpret them and what signals can be used to apply them to our analyses. We have different types of indicators, whether volume, trend, oscillators and other types. In today's trading training we are going to talk about the ATR indicator and how it works.
What is the ATR indicator?
Let's start this trading training by explaining what this indicator is about. The ATR (Average True Range) indicator is an indicator from the oscillator family. Translated into Spanish it means “True Range Average”, since this indicator allows us to know the existing volatility of an asset in the range in which it is located. It was created by the great J.Welles Wilder Jr., creator of other great indicators such as the ADX or RSI. As we have seen in the deliveries of trading training articles, this engineer's indicators try to dissect financial assets from perspectives that were not previously considered.
How is the ATR indicator measured?
Let's now see how this indicator is measured to understand in depth how it works. As we have commented in the previous paragraph of this trading training, the ATR indicator is used to measure price volatility, that is, the range in which the price moves in a certain period of time. Therefore, the greater the volatility, the greater the range in which the price moves.
As we can see in the graph above, the ATR, like other indicators such as the RSI or the ADX, oscillates between values that measure the current volatility of an asset (not the future). The ATR indicator offers us the true range, which for daily calculation is the largest value between the maximum price of a day minus the minimum price of that day, the maximum price of a day minus the closing price of the previous day and the previous day's closing price minus the current day's low price.
How is the ATR indicator calculated?
The formula for calculating the ATR indicator consists of certain characteristics. As we have commented in the previous paragraph of this trading training, first we need to find the largest value between the maximum price of a day minus the minimum price of that day, the maximum price of a day minus the closing price of the previous day and the previous day's closing price minus the current day's low price. Next, when we have the calculated values, we apply the following formula to reveal the average of the true range: ATR = (previous ATR x (n – 1) + current period ATR) / n The value of “n” is defined by the number of periods that we choose, which we recommend to be between 7 and 14 as recommended by its creator.
How can we take advantage of the ATR indicator for our trading training?
Now that we have seen what this indicator is, how it is measured and its calculation formula, let's follow the trading training to see how to interpret it. As we have mentioned, the indicator is an oscillator that helps us measure the current volatility of an asset. It will be of great help to us to discover what is the maximum and minimum in which the price of said asset usually moves. Therefore, it will be of great help to us in establishing profit and loss limit levels. Let's see how to take advantage of the ATR for our trading training:
ATR with high values.
As we have mentioned, the ATR allows us to measure the current volatility of the asset we are analyzing. Therefore, when we see that the values shown by the ATR are high, it means that the movements will have a long journey. This tells us that we are close to witnessing a big rise or fall.
ATR with low values.
On the other hand, if we see that the ATR shows us low values, it means that the volatility in the market is low, because there is little activity in the market. This happens in periods of consolidation, where the price of the asset in question remains in a range without offering trading opportunities.
Conclusions from this trading training on the ATR indicator.
After finishing this trading training on the ATR indicator, we are going to review its strengths. As we have seen, it is an indicator of the oscillator family, belonging to the indicators created by the great J.Welles Wilder Jr. It is an indicator that allows us to measure the current volatility of an asset in order to establish order levels. loss and profit limit. We have seen the appearance of the indicator along with the calculation formula to be able to form the indicator (the average values represented with a red line). Next, we have seen how we can take advantage of the indicator for our operations. As we always mention in all the articles for your trading training, the technical indicators that recommend using them in combination, creating set ups of indicators to be able to calculate the different parameters in the technical analysis, such as volume, volatility or ranges of prices.