The ATR indicator has got just one signal: it rises or falls | LiteFinance

The ATR indicator has got just one signal: it rises or falls The higher the ATR value is, the more volatile the market is, and the faster the trend line moves from one range limit to the other.

In segment 1, the indicator is moving horizontally. It means the market is flat: the amplitude of price fluctuations and candlesticks' size are small.

In segment 2, the ATR value is surging, and the indicator starts growing. It means volatility is increasing, and we should look for an entry point.

As the ATR doesn't indicate a price direction, we shall determine it ourselves. For example, draw support and resistance levels through the flat range's extremums and open a trade in a breakout direction.

In segment 3, there remains high volatility, but the trend is changing direction. A trader's task is to catch the price line reversal on time and reverse the trade when volatility is still high.

In segment 4, the indicator is returning to its lowest values in a flat range. It means volatility is declining; the pace of price changes is slowing down; the amplitude of price moves is decreasing; the candles' bodies are becoming shorter than the candles in segments 2 and 3.

That can indicate a flat market or a trend slowdown. In our case, we have a slow downtrend. It's a signal for swing-traders and scalpers to exit the market.

Here's how we can use the ATR's signal about a rise in volatility:

A new trend's start is a signal to open a short-term trade to catch the fastest price movement in either direction over a short period. It’s one of the options for scalpers.

A sharp increase in the price movement amplitude is a signal to exit the market or increase stop orders' value. Suppose we have a medium- or long-term trade, and the stop order value was calculated based on the maximum possible drawdown, according to our risk management rules.

We see that the volatility is growing sharply. We have two options: to close the trade earlier before the price reaches the stop level or top up our account, increase the stop value, and wait for a temporary drawdown to end.

This volatility indicator doesn't point to overbought/oversold areas, so its readings are estimated compared to the readings over previous periods by zooming out the chart.

Volatility levels don't depend on a price direction. The indicator's line can be rising, while the price can be moving up or down.

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