While the Average True Range (ATR) was originally developed in the 1970s to measure volatility and risk in the commodities market, all trading systems of all asset classes should be focused on risk management. So traders in the forex market, stock, options, commodities or crypto markets should integrate the indicator in their trading strategy.
Unlike other volatility indicators such as Bollinger Bands, the ATR does not give the direction (uptrend or downtrend) or strength of trends. Instead, the indicator only measures how far price typically deviates from the average during a particular time period. When doing technical analysis, it is possible to assess volatility simply by looking at candlesticks. A volatile market will typically show a mix of bullish and bearish candles. The price action during such periods is represented by relatively long wicks (shadows) and short bodies.
But a true range figure can be derived in a similar way for any time frame. This will give the amount that the instrument has moved during that time period. The ATR is then calculated as an Exponential Moving Average of the true ranges for a number of time periods. For forex traders and stock traders, this is typically 14.
It’s important to understand that it’s a lagging rather than a predictive indicator. It’s perfectly possible for periods of low volatility to coincide with strong trends – and vice versa. The ATR does not provide entry or exit trading signals such as a breakout or reversal. However, as part of a trading strategy, it can be used in conjunction with other technical indicators to ensure optimal risk management.