ATR Indicator (Average True Range)
Created by J. Welles Wilder, the ATR is probably the most commonly used technical indicator when calculating volatility. Just as with Wilders other popular indicators, the ATR was created with the commodity markets in mind. Wilder produced this Average True Range in order to record the volatility that might have been lost in calculations only looking at daily ranges (not factoring in any overnight price gaps as are often seen on markets which open and close daily). The ATR doesn’t offer a signal of the price path, but simply offers a reading of the volatility.
Wilder featured the ATR in his famous technical analysis book, “New Concepts in Technical Trading Systems”. This book also featured the RSI indicator amongst others.
The ATR provides Forex traders an insight into precisely what the actual historical volatility was so over a given period so as to prepare for trading in the market. Some traders use this indicator as price reaches support and resistance to guage whether the range may be overstretched at a given time.
Users of Metatrader software can find the ATR indicator under the indicators > oscillators area. The default setting is 14 periods. When in more volatile markets (larger candles) the ATR steps up, in the course of less volatile markets (smaller candles) the ATR reading will go down.
One of the most common uses for ATR is in the calculation of stop loss sizes. If you use ranges when calculating your stop losses the ATR can be useful. We can see on the 5 minute chart below that the ATR over 14 periods is 16 pips. Traders may take this value and possibly double/triple it when working out stop loss sizes if breakout trading, swing trading etc.