ATR indicator (Average True Range) was developed in the late 70s’ of the previous century. It was developed by Welles Wilder. This indicator, as well as many others, was initially designed for the commodities markets only. But today its application is more widespread. This indicator is the volatility indicator, so it can be also used during the binary options’ trading with the Forex currency pairs.
Calculation methods of ATR indicator
One of the peculiarities of this indicator is that it shows maximums of three values, including the current trading range, the absolute distinction of maximum and the previous closing level, as well as the absolute distinction of minimum and the previous closing level. If the current range is wide enough, then the indicator’s showings will be based on them. Otherwise, a calculation is conducted based on the absolute distinctions of minimum and maximum, as well as the previous closing level. In the majority of cases, two last mentioned calculation methods are used when the current trading range narrows and the previous closing levels are located above and below current maximums and minimums.
Practically and usually, the Average True Range with 14 periods is used. By the way, on our binary options’ chart these settings are used by defaults with this indicator. This auxiliary tool can be applied with the short-term expiration time of binary options, as well as for the mid-term and the long-term trade.
The extreme points of the indicator’s line can usually show the upcoming change of the trend in the market, as well as the beginning of the new movement. As mentioned above, the Average True Range binary options’ indicator is used to determine volatility in the market, but can’t show a direction of the movement or the trend’s duration.
What does ATR indicator show?
If the indicator’s line is located near the low values, then there is the tranquil situation in the market, it is possible that the trade in the narrow range is occurring. But when the binary options’ indicator ATR moves to higher values, the intense trading starts in the market and the broad range of prices may occur. If the indicator’s line stays low for a long time, it is possible that there is a consolidation in the market, which will result either in the continuation of the current trend or in its quick change. If the binary options’ indicator ATR that stays high, it can’t last for a long time because a strong trend usually exhausts quickly.
In general, concept of this indicator can be formulated in the following way: if its values are high, then the trend may switch to the opposite one. If the values are low, the current trend has a pretty weak directionality. In order to trade binary options using this indicator, it is desirable to set another trend’s auxiliary indicator in addition to it. It doesn’t mean that the ATR indicator is useless. It carries out its function which is not aimed to determine a trend, but can show its strength or an upcoming change. If the additional trend indicator starts to show that the trend’s formation is occurring in the market and, at the same time, the ATR binary options’ indicator starts to grow, it will show that the possibility to buy either Call or Put options is appearing in the market. The exact kind of binary option that has to be purchased depends up the type of direction which appears on a chart.
The ATR binary options’ indicator has its own disadvantages. For example, it may lag in a number of cases. At the same time, it will show not the current values of volatility, but the previous ones.