What is Forex Trading?
Trading is buying and selling on the stock market with the aim of achieving a return in the short term. In other words, it is like investing but in the short term. Forex (Foreign Exchange), FX refers to the currency market. So when we talk about trading in Forex we mean buying and selling in the very short term in the foreign exchange market.
In this blog we will talk specifically about it, how you can generate income by trading Forex, some myths ... In short, how you can earn you can get real money trading with profitable strategies. We agree that sometimes within trading the greatest enemy is the amount of toxic information. This is a place where with name and surname I talk about trading, about what works for me and what doesn't and why. And above all I tell you about my day to day trading in forex with automatic systems.
You will find content about brokers, tools, market conditions, vocabulary within the trading world, experiences, events and much more. In addition, I will try to share tips with you to polish your trading as I do. The path of the trader never ends, fortunately.
Volatility in trading Applying the ATR indicator
Have you ever thought about how to use volatility in your trading? How to apply some filtering according to its behavior? The ATR indicator can help you with this.
In this article I will show you a lot of information about the Average True Range (ATR), an indicator unfairly forgotten in trading systems.
What are technical indicators and how can I use them?
Technical indicators, among which the Average True Range (ATR) is based on a series of calculations on price action (some also on volume).
I'm sorry to say that using technical indicators does not always work. But they can be useful tools to detect entry and exit patterns in the market.
There are quite a few technical indicators that have been developed, some show us when the market enters an overbought or oversold situation, others show us when a trend can be exhausted, if a move is reliable and how far it can go.
The ATR shows us the existing volatility in a market, as well as its variations.
🎯 What is ATR?
ATR stands for Average True Range. This indicator was developed by J. Welles Wilder.
It is just an average of the price ranges (in fact, its name in English corresponds to the average of the true range). A true range is the measure of volatility that can exist between two successive time periods (e.g. two trading sessions, two weeks, two hours, etc.).
To the point, it is a technical indicator of volatility. Volatility shows how strong the price movements are, have been and may be (based on estimates). This can be useful both to calculate risk and to filter market entry and exit (we will go into more detail later on about the importance of this for our trading).
The ATR simply reflects the periods in which the market has behaved more violently (is more volatile) and whether the volatility increases or decreases.
💣 How did the ATR come about?
Wilder, the creator of this and other technical indicators (such as the Relative Strength Index; RSI or the Parabolic SAR, among others), was a commodity market trader.
This trader used financial futures for his trading. Futures are leveraged instruments (like Forex and CFD trading) and therefore are very sensitive to strong price movements. For this reason, he discovered that it would be convenient to have a tool that would allow him to know the range in which the market can move in a day.
However, it may be that the market opens at a different price from the previous session's close (known as a gap) and does not move much further during the present day. In this case, the behavior in one day is not very volatile, but if we consider the variation from the previous close, there may actually have been volatility.
For this reason, Wilder developed a calculation formula that allows us to see not only the volatility of a single day, but in contrast to the previous day. Similarly, by averaging this calculation, you can see how volatility evolves in the market over a period of time.
His idea, which is still valid, was that after a period of high volatility another period of low volatility would follow; and vice versa.
📝 How the ATR is calculated - Average True Range
As with all technical indicators, the Average True Range (ATR) is based on calculations of past price movements.
To calculate this volatility indicator we must start from the True Range of the current period (True Range). You must also set the periods that will be taken as the basis for the calculation (i.e. the number of candles or bars immediately preceding it).
As a general rule, the period used is 14 (they can be daily, weekly or monthly periods). Wilder, its creator, used this value for its development (also on a daily basis). However, there are traders who use a very different operation to that of the father of the ATR and for this reason the period is configurable.
📐 Find true range
As I said before, the ATR indicator is only an average of the true range calculated over the periods indicated. It is taken as the value to define the range (True Range), the highest value of these three:
The maximum price of the current period - the minimum price of the current period
The maximum price of the current period - previous period closure.
The previous period's close - the current period's minimum price.
The difference between the prices (in other words, the range of movement they have had) shows us whether the market has been more or less volatile. The greater the range means that more volatility has occurred.
Thus, the true range includes the gaps that may arise in a market. This price gap, when taking the stock market session change, better reflects the strength of the oscillations and helps us to measure volatility in a more reliable way.
As a last point, by creating an average over these values, we can observe the volatility variations. In other words, whether it goes up or down.
🏧 Calculation of the ATR indicator
The formula for calculating the ATR indicator is as follows
ATR= [(previous ATR * n-1) + True Range of current period]/n
Where n is the current period.
In any case, the default setting of the ATR, which Wilder left us, was over a period of 14 days. As mentioned above, the periods are taken on a daily basis (i.e. to calculate the ATR we take the price movements of the previous 14 sessions).
Thus, the original ATR would look like this:
ATR= [(ATR previous period *13) + True Range of current period] /14
Although this is the formula that its creator used to trade in the commodities market and know its volatility, the ATR can be configured according to the market, your trading style (scalping, swing, etc.) or strategy that you can use.
📊 Graphical representation of the Average True Range
To make it easier to use the ATR indicator, it is shown graphically at the bottom of our price chart (although there are platforms that allow you to place it at the top).
The vast majority of trading platforms have this indicator and you only need to select it in the corresponding section and insert it. They also allow you to set the number of periods over which you want to make the calculation.
