The average true range (ATR) is a technical analysis indicator that looks like a single line in a section under your chart and the line can move up or down. Many binary options trading experts and beginners are fans of this tool that measures market volatility. The ATR is useful in any market (stocks, futures, cryptocurrencies, forex, more). It is best to use it for short-term binary options trading. It is enough to predict the price movement and buy the corresponding option to make money in the electronic contracts market. Most traders prefer to buy short-term contracts in a volatile market, where the market noise is minimal, and the price goes into a stable direction.
Historically, it was introduced by a market technician J. Welles Wilder Jr. in his book New Concepts in Technical Trading Systems. Reading the ATR indicator is not complicated: a higher ATR means increased volatility, while a lower ATR signals lower volatility.
Settings and features of the ATR Indicator
When you want to use ATR for trading, select from the list of available advisors in your trading account. Since it is an oscillator based, it will be displayed below the price chart in a separate window. Many traders say that the tool looks like other oscillators. It is true that some of the most commonly used tools to gauge relative levels of volatility are the Cboe Volatility Index (VIX), the average true range (ATR), and Bollinger Bands. For analysis, a scale and a signal line are traditionally used.
Different traders use different settings, but a common approach is to take 1.5 x multiple of the current ATR indicator reading. The algorithm of the indicator compares the average price value for the n-th period with the current one. This is how the level of volatility inherent in the value of an asset at a given moment in time is determined. The standard setting for the ATR is 14, which means that the indicator will measure the volatility of a price based on the 14 most recent periods of time. As mentioned above, this is typically 14 days. Some experts recommend setting a value of 14 for timeframes up to H4 and a value of 7 for higher time intervals. Using an ATR setting lower than 14 makes the indicator more sensitive and produces a choppier moving average line.
How to use Average True Range for binary options trading
Please, consider the fact that the tool is not designed to search for signals. Therefore, you should not use it as a basis in your trading strategy. However, in turbo options trading, where volatility plays a key role, it will come in handy.
The indicator is great for measuring the level of volatility. If its line crosses the average level from below and tends upwards, then the volatility grows. This is the best time to trade fast contracts. The figure below shows activity and direction of the movement is at this moment in the market.
When the signal line crosses the average level from above and tends to zero, it is better stop trading turbo options. The example chart shows a sideways movement.
Trading signals occur relatively infrequently, but usually spot significant breakout points. The logic behind these signals is that, whenever price closes more than an ATR above the most recent close, a change in volatility has occurred. ATRs are, in some ways, superior to using a fixed percentage because they change based on the characteristics of the stock being traded, recognizing that volatility varies across issues and market conditions. As the trading range expands or contracts, the distance between the stop and the closing price automatically adjusts and moves to an appropriate level, balancing the trader’s desire to protect profits with the necessity of allowing the stock to move within its normal range. In any case, Average True Range is a great addition to any strategy for short-term options trading.
Caution! This article is not intended to be investment advice. No strategy can guarantee 100% correct trading results. A successful trading result in the past is not a guarantee that it will be repeated in the future. Any information contained in this article is for informational purposes only.