Developed by Wilder, ATR gives Forex traders pips forex feel of what the historical volatility was in order to prepare for trading in the actual market. Forex currency pairs that get lower ATR readings suggest lower market volatility, while currency pairs with higher ATR indicator readings require appropriate trading adjustments according to higher volatility.
During more volatile markets ATR moves up, during less volatile market ATR moves down. When price bars are short, means there was little ground covered from high to low during the day, then Forex traders will see ATR indicator moving lower. If price bars begin to grow and become larger, representing a larger true range, ATR indicator line will rise. ATR indicator doesn’t show a trend or a trend duration.
Wilder used daily charts and 14-day ATR to explain the concept of Average Trading Range. In other words, it tells how volatile is the market and how much does it move from one point to another during the trading day. ATR is not a leading indicator, means it does not send signals about market direction or duration, but it gauges one of the most important market parameter – price volatility. Forex Traders use Average True Range indicator to determine the best position for their trading Stop orders – such stops that with a help of ATR would correspond to the most actual market volatility.