The Average True Range (ATR)  is an indicator that allows the operator to measure the volatility of the market, which was created in 1.978 J.Welles Wilder, who was announced for the first time in his book published called “New Concepts in Technical Trading Systems”.

Like other indicators this was created for comfort and ease of Forex traders, so they can learn about the actions unstable and stable market and prices at the end of the day. In other words, the ATR indicator can indicate the strength or weakness of a trend and allows you to calculate the average daily Pips a given pair. It should not be taken as an indicator or signal generator to take any position in the market.

However, this indicator it may seem a bit contradictory, if used in conjunction with strategies, may show what is the best time to enter or exit the market. It is important that you know that the ATR does not measure the direction or changes in market direction or the last time that volatility. On the other hand, the ATR indicator is used as a basis for other composite indicators such as RWI (Randon Walking Index), among others.

How to use the ATR indicator?

The creator of this indicator uses 3 options to get its value as follows:
• The absolute value of a distinction between the current maximum and the previous closing price.
• The absolute value of the distinction between current minimum and the previous closing price.
• The distinction between current or maximum current and minimum current .

This also established a formula to obtain the data: 
Formula:            ATR = Moving Average (TRJ) (n)

To be more explicit, taking the formula described above, if the greater of the three values ​​(High-Low, High, Close, Low-Close) is the difference between maximum current and minimum current, in which case this will be the result of range true. If this value is not the greatest you should proceed to identify what is the greatest of all and thus get the true range. Having performed this operation and obtained the results, apply a mean or average true range obtained on the N days, where N is = 14 or 13.

As a rule, the ATR is used with periods of 14 days and can be calculated by day, week or month. It is always advisable to use this indicator placing “Stop Loss Order” to prevent further losses, but based on market volatility and protect the benefits already obtained. We do not recommend using this indicator over long periods because it can give inaccurate results. 

How to place a “Stop Loss Order” based on ATR, for best results:

This is considered another way to use the ATR and get a greater benefit. Usually you use a command “Stop Loss” setting when operating to avoid further losses. Typically operators consider the support or resistance levels should be strictly used as “Stop Loss”, however when using the ATR indicator this may vary. In this example, we can say that we will use a stop loss of 25% of daily ATR ATR value of that day was 140, then proceed to multiply the two figures, which is: (140) (0.25) = 35pips. It obtained this information you could place a “Stop Loss Order” of 35 pips from your entry point.   

How to interpret the ATR indicator when operating:

For example, if the result of ATR shows that low values ​​indicate that the market is in a landscape of low volatility and very low price range. If instead the opposite occurs and the ATR would give you high-value or high, this indicates that the market is in a landscape of high volatility and therefore very wide price ranges.