The natural education process takes a trader a considerable period of time. Meanwhile, during this period many trading systems and strategies are usually worked out. It is also associated with a great number of various indicators, which constantly update the libraries and arsenals of the traders. However, there is a small mistake the traders often make. In the process of learning the innovations of technical analysis often lure online traders to the jungles. As a result, after many losses and defeats, the trader gets back to the very first basic approaches after a while. However, time can also be a loss. But this is all about the basic indicators. First of all, you should spend your time on improving the trading process with the familiar basic indicators. One of the very interesting analysis tools is the ATR indicator. It is also known as the Average True Range.
Its principle is not complicated and it operates quite understandably.
- When the indicator line rises to the top mark, it indicates a high trading activity in the market.
- If the indicator line falls or remains in the low values area, it indicates the sluggish trading movement.
- When the indicator line remains at lower values for a long time, a sort of “lying” there, it indicates that sudden movement is expected soon. But the ATR indicator doesn’t show the direction of this movement.
The image below shows the line indicator in the lower values area, and when it is trying to climb it just goes back. This means that the trading range and volatility are constantly decreasing. If the time period lingers, it signals about the possible price jump in an uncertain direction. To define the direction, you should use additional indicators.
The ATR indicator can also be interpreted as an indication of a possible trend change. At the moment when there is a movement of indicator line to the upper values, this indicates an increase in market volatility, i.e. trading range is growing. This in turn suggests that the probability of a trend change also increases. Therefore, you should bear the value of the indicator in mind as a warning of change in the price movement direction.
By virtue of its purpose, the ATR indicator also perfectly works as a source of divergence or convergence, which is an inherent advantage of this analytical tool.
The image below shows the most famous and important trading signal.
But I would like to show you the easiest way to use this indicator with another one, which is also basic and very common. It is the Relative Strength Index.
When used together, they form the following picture:
- Yellow area: the ATR shows activity and increased liquidity while in the upper values. In the meantime, the RSI is overbought or oversold. The situation speaks for itself: the overbought area coupled with the increased volatility results in a signal to open an order.
- Red area: the ATR is in the lower values, which suggests the imminent price movement in either direction. The RSI will be the one to show the likelihood of a certain direction in this case. If it is in the overbought zone at the moment, then we can prepare an order to sell. In case of the oversold area – to buy.
Actually, the use of the ATR with the RSI is nothing else than a simple addition of each other. But it increases the probability of the determined movement.
On this basis, we can conclude that the ATR indicator can be used in trading after being carefully studied – just like any other one.Social button for Joomla