How to measure volatility using ATR

You measure volatility in forex using ATR indicator to spot break out opportunities. Volatility measures the rate at which price moves. 

Volatility indicators like  Average True Range (ATR) help to gauge the state of the market;

• High volatility,
• Low volatility
• Possible breakouts 
•  market reversals.

What is Average True Range(ATR)

 Average True Range is a single line indicator that measures volatility. It is one of J. Welles Wilder indicators.   

Unlike other trading indicators that measure trend momentum or direction, ATR does not. It simply shows when volatility is high and when it is low in the market.

Like the RSI, MACD, stochastics, to use ATR ,you first add it on your trading chart and it will appear in a separate window to the bottom of your chart.

Here is an example, ATR on a Forex Chart

When ATR is rising, it is an indication that volatility is also rising.

When ATR is falling, it is an indication that volatility is falling too.

How to measure Volatility using Average True Range (ATR)

ATR measure volatility in forex by showing the average trading range of the market for a given period of time. It grows along with volatility and falls with it.

When ATR is rising, its shows that volatility is also rising whereas when  it is falling it is an indication that volatility is dropping down.

Using this indicator you are able to tell when price is trending or ranging. 

 You can therefore use the ATR indicator to determine possible breakouts basing on the strength of volatility. ATR can also be used to set stops and targets after taking a trade.

Take a look at the AUDUSD, Daily chart below;

From the above chart,

You will notice that as the ATR indicator rises price also responds and as it falls, price starts to congest which is a sign of fall in volatility.

With all this information, you can gauge when to take trade and when to exit in the market.

As price gets out of congestion, the ATR indicator starts to rise which is an indication for an increase in volatility so this would be a good time to take a position.

If ATR was rising and then starts to fall, it indicates a change in volatility and  this sends a warning to exit trade or prepare for a market consolidation.