Oscillator ATR: secondary instrument for profitable trading

ATR (Average True Range) is an unusual oscillator, because it isn’t a trend as majority of indicators, but shows the market volatility. In 1978, ATR was formulated and described by the well-known trader Jay Wells Wilder. Oscillator success was confirmed by continued apply of instrument and a number of profitable forecasts. Now it is in standard indicator sets on all known broker platforms including the IQ Option.

Selection and configuration ATR in IQ Option trading terminal

Trader who wants to apply ATR to trade with broker IQ Option must click on indicator set icon and select an instrument from list.

ATR configuration window is displayed.

Financial instrument configurations can adjust applying a single variable: period. This is time that is calculated in ATR and is measured by candles/bars number regardless of timeframe. In oscillator configuration window, graphical variables are also available, allowing the trader to choose convenient instrument line thickness and colour.

How does ATR work?

User has to apply his choice after setting up instrument. Oscillator will appear in IQ Option trade room. ATR operates within a separate area under price schedule. This is a curve that confirms market volatility.

Indicator works by an algorithm that consists of two mathematics actions:

  1. Program calculates true range (TR), i.e. determines the highest value of difference between current high and low, finds the difference between today’s high and yesterday’s closing price, and also calculates the balance from current low and yesterday’s closing price. Result is obtained as an absolute price value.
  2. Program smooths the received absolute price by a moving average period of 14 to average the true range.

High values as a result of ATR calculations (curve passes above average line of calculated instrument scale) show strong market volatility. And small values (curve runs in lower half of oscillator scale) show a low activity of market participants and, as a consequence, low volatility.

How to practice ATR in trading?

ATR doesn’t generate direct signals for purchases/sales, but it helps to choose the right time to search for entry points to and exit from market. Traders receive signals for deals applying other means and methods of technical analysis: numerous patterns, standard graphic tools or trend indicators.

Patterns for deals

  1. Pin bar. Figure in technical analysis, which consists of a single candle with a small body and a long tail. Body must be less than third part of whole candle.
    • Bearish pin bar (candle with upper tail) means that tendency will soon go down. This is a signal for sale.

    • Bullish pin bar (a candle with a lower tail) shows a subsequent rise in price. This is a signal to buy.

  1. Absorption. Figure in technical analysis, consisting of two mutually opposite in direction of candles. There are two kinds of this:
    • bullish absorption (when first candle is downward, and second one is rising). This is signal to buy;

    • bearish absorption (when first candle rising and second falls). This is a signal to sale.

Users can recognize the signal to close current deal applying ATR. When the market formed a clear bull or bearish trend, oscillator curve will fluctuate at top of scale and confirm the strength of current tendency. When curve reached highest point on indicator chart then forming a signal about completion of current trend. Trader should close the deal and fix profit, because after that the turn of current tendency or flat.

Summary

In this material, indicator of market volatility is considered, which is mainly applied in conjunction with trend instruments or patterns designed to determine entry points to market. Traders consider this instrument to be a filter of false trading signals, which increases the number of profitable deals.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future

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