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.

Free Trading Guides
EUR/USD
Bullish
GBP/USD
Bullish
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
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
Gold
Mixed
Oil - US Crude
Mixed
Bitcoin
Bullish
More View more
Real Time News
  • The Singapore Dollar is driven by the Monetary Authority of Singapore, which manages exchange rate instead of short-term interest rates. Learn more on the $SGD and how to trade it. Get your update from @ddubrovskyFX here: https://t.co/eWLM9XZs5Y https://t.co/OWuwGML4Ch
  • RT @FT: Huawei admits that US sanctions are hurting https://t.co/GIT4XSfszx
  • RT @WSJecon: Mexico’s inflation eased in September, coming in line with the Bank of Mexico’s 3% target for the first time in three years ht…
  • My phone's decided to give up the ghost and I've been phoneless for 24 hours. Not coincidentally, I've been a machine tackling errands around the house. What a time to be alive.
  • #Gold remains stuck in a range as a range of conflicting forces battle and fail to take control of price action. Get your $gld market update from @nickcawley1 here: https://t.co/pw7UjkUyqH $XAUUSD https://t.co/YD8L6knjhe
  • Geopolitical developments send oil prices soaring or falling. Get your market update here: https://t.co/0znHZPvPON https://t.co/s358dvMBeR
  • Currency markets may be battered by breakneck volatility if a slowdown in global economic growth triggers a collapse in the fragile market for collateralized loan obligations (CLOs). Get your market update from @ZabelinDimitri here:https://t.co/KfjjtaXs7b https://t.co/sWeSlv33pb
  • The #Dow Jones and #Nasdaq 100 will await key earnings from some of the world’s largest manufacturers and tech companies while the #DAX grapples with freshly-imposed tariffs. Get your equities market update from @PeterHanksFX Here: https://t.co/u2lG19JFt3 https://t.co/OHs4rQEH7T
  • Crude #oil prices are consolidating above a key support zone we’ve been tracking for more-than three months now. Get your market update from @MBForex here: https://t.co/XaACvEpLG4 #OOTT https://t.co/XjmjUt4Par
  • Why trade with Bollinger Bands®? Find out as a day trader, how you can use it to your advantage:https://t.co/dwODDDSsFi @WVenketas https://t.co/SYduJ5k9mL
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

News & Analysis at your fingertips.