News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Oil - US Crude
Mixed
Wall Street
Mixed
Gold
Bearish
GBP/USD
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Bullish
More View more
Real Time News
  • What is the outlook for financial markets ahead of the first presidential debate and how are Democratic nominee Joe Biden and President Donald Trump doing in the polls? Find out from @ZabelinDimitri here:https://t.co/QQwAZTxZFg https://t.co/yy0FTn9Pnp
  • Anti-fiat #gold prices suffered the worst week since August as the US Dollar gained ground. Will losses extend? All eyes turn to fiscal stimulus hopes and non-farm payrolls data. Get your #metals update from @ddubrovskyFX here: https://t.co/054CJvOWw4 https://t.co/BzODShHmqH
  • The US Dollar could gain as it forms bullish technical formations against the Singapore Dollar and Malaysian Ringgit. USD/PHP may have bottomed, will USD/IDR rise next? Find out from @ddubrovskyFX here:https://t.co/3UIKmbLIvD https://t.co/me8wMRpJjE
  • What is seasonal change in volatility. Are we going through one right now? Find out: https://t.co/G0qfpOmMl2 https://t.co/HXCQzUQgxA
  • The US Dollar will be bracing for a cascade of political risks including the first presidential debate, ongoing stimulus talks, the Supreme Court vacancy against the backdrop of key employment data. Get your #currencies update from @ZabelinDimitri here: https://t.co/quU4MmUjxA https://t.co/jF6ubwRz1P
  • The Indian Rupee may be at risk to the US Dollar as USD/INR attempts to refocus to the upside. This is as the Nifty 50, India’s benchmark stock index, could fall further. Get your $USDINR market update from @ddubrovskyFX here:https://t.co/3wsYlSxd26 https://t.co/PfIVibmqn1
  • Did you know a Doji candlestick signals market indecision and the potential for a change in direction. What are the top five types of Doji candlesticks? Find out: https://t.co/td5WA4hCZC https://t.co/lKvEMf4QRe
  • Weakness in equity markets continued last week as losses built and technical patterns hint further bearishness might be ahead. Get your #equities update from @PeterHanksFX here: https://t.co/GGVrB3r7if https://t.co/HPHUC8EG3o
  • Forex liquidity makes it easy for traders to sell and buy currencies without delay, and also creates tight spreads for favorable quotes. Low costs and large scope to various markets make it the most frequently traded market in the world. Learn more here: https://t.co/5uSWKoLkd6 https://t.co/q80wSAoxXP
  • There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? Find out here: https://t.co/aVAzFypAg1 https://t.co/7mc19Gxrvm
Measuring Volatility with Average True Range

Measuring Volatility with Average True Range

2011-08-11 13:37:00
Jeremy Wagner, Lead Trading Instructor,
Share:

Average True Range (ATR) is a tool used in technical analysis to measure volatility. This indicator does not provide an implication for the direction of price trend. It simply measures the degree of price volatility from high to low for the day.

A simplified explanation of the ATR is that it measures the range of a session in pips and then determines the average of that range over a certain number of sessions. For instance, if using a daily chart with a default setting of 14, the ATR will measure the average daily range, from high to low of the previous 14 days. This way you are getting a current reading on the volatility of a specific currency pair. The idea is that large and increasing values shows ranges that are expanding. As the market normally breathes in and out, this expansion of volatility indicates to us how far prices may reach.

As a result, many traders us ATR as a method to identify and limit risk on trades. For example, if you typically hold trades open for at least a day, you will want to use a stop loss level that is at least 1 Daily ATR value away. That way, as the market goes through its normal breathing, the majority of the movement is likely to be contained within 1 ATR value.

Let’s compare 2 different markets with different ATR values.

Measuring Volatility with Average True RangeMeasuring Volatility with Average True Range

(Created by J. Wagner)

The current 14 day ATR for the EUR/GBP is about 82 pips while the same 14 day ATR for the GBP/AUD is more than three times that amount at about 256 pips. So we can see why a standard 100 pip stop is not the best way to determine your risk on every trade. Many traders will simply use the ATR for their risk. They would place their stop 82 pips from their entry in a EUR/GBP trade or 256 pips from their entry in a GBP/AUD trade. This is one way to base your risk on the reality of the current market you are trading.

Another interesting point on the charts above is where values have generally stood over the recent past. As you can see in the EUR/GBP, it has produced ATR values less than 100 pips for the majority of the previous 12 months.

On the GBP/AUD, at its lowest zone of volatility (red boxed area), it averaged around 140 pips. It is apparent the volatility on the GBP/AUD reaches beyond the current market conditions. It has historically had 2-3 times the size of volatility as the EUR/GBP.

Next: The ADX Indicator Is a Power Tool for Trading Trends (20 of 50)

Previous: How to Trade the Aroon Indicator

Additional educational resources

How Do I Know If a Stop is Too Big

Jeremy Wagner contributes to the Instructor Trading Tips articles.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES