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Average True Range
Introduction
The indicator Average True Range (ATR) was published by J. Welles Wilder in his book
"New Concepts in Technical Trading Systems" - 1978. It measures a security's volatility.
Originally developed to calculate the degree of commodity's price movement, ATR doesn't
show the trend direction or force.
The Average True Range is an exponential moving average (typically 14-days) of the True Ranges.
The True Range indicator is the greatest of the following:
- The price difference from today's high to today's low.
- The price difference from yesterday's close to today's high.
- The price difference from yesterday's close to today's low.
Normaly, on the Forex Market, th gap between the previouse bar Price Close and the current bar Price Open are minimal. This means, the previouse Pricce Close is in the limits of today's price and the True Range is equal to current bar Price High - Price Low.
Calculation
TR = Max[ (PH - PL), (PH - PC1), (PC1 - PL) ]
ATR = MA(TR, n)
Where:
TR - True Range
PH - Current bar Price High
PL - Current bar Price Low
PC1 - Previous bar Price Close
MA - Moving Average
n - period of MA
Parameters
Logic - from this dropdown box we chose the logic of using of the indicator. The possible logics are:
- The indicator value is rising.
We have a signal buy when the current bar value of the indicator is higher than the previous bar value. And we have a signal sell when the current bar value of the indicator is lower than the previous bar value. - The indicator value is falling.
We have a signal buy when the current bar value of the indicator is lower than the previous bar value. And we have a signal sell when the current bar value of the indicator is higher than the previous bar value. - The indicator value changes from downward to upward.
We have a signal buy when the current bar value of the indicator is higher than the previous bar value and the previous indicator value is lower than the indicator value of the bar before the previous one. And we have a signal sell when the current bar value of the indicator is lower than the previous bar value and the previous indicator value is higher than the indicator value of the bar before the previous one. - The indicator value changes from upward to downward.
We have a signal buy when the current bar value of the indicator is lower than the previous bar value and the previous indicator value is higher than the indicator value of the bar before the previous one. And we have a signal sell when the current bar value of the indicator is higher than the previous bar value and the previous indicator value is lower than the indicator value of the bar before the previous one.
Method - During the calculating of the Average True Range, the Forex Strategy Builder uses Moving Averages to smooth the values. From here we can chose the calculation method of the MA.
- Simple - Simple Moving Average.
- Weighted - Weighted Moving Average.
- Exponential - Exponential Moving Average.
- Smoothed - Smoothed Moving Average.
Use previous bar value - when we open a position on price different than Price Close or Day Close, we have to mark this check box. This guarantees us that at the time of opening we use the correct indicator's value.
Default parameters:
- Logic - The ATR value is rising.
- Method - Simple.
- Smoothing Period - 14
Usage
The indicator Average True Range shows the volatility of the market. Its value can not be compared with the
market price. In this reason, ATR can't be used in the Open or Close Slot,
but in a Filter Slot, only.
In a Open Filter, ATR expresses a logic condition, that allows the opening a new position
(all Open Filters' logic conditions must be satisfied).
In a Close Filter, ATR expresses a logic condition, that forces the closing of the current
position (only one Close Filter's logic condition satisfied is enough).