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Almost everybody who is familiar with Technical Analysis is also familiar with J. Welles Wilder. He is the person behind many technical tools. His most famous indicators are.

• RSI - Relative Strength Index
• ATR - Average True Range
• Parabolic SAR - Stop and Reversal Indicator
• ADX - Average Directional Index

He has developed his indicators for different purposes such as recognizing the existence of trend, volatility of the market, change in the direction of the trend, and whether the market is overbought or oversold.

One of his useful indicators which I will discuss in here is ATR. This indicator evaluates the volatility of the market. ATR stands for Average True Range. To understand ATR we need to know what True Range is.

What is True Range

One simple approach to calculating the volatility of the market is to consider the range of each bar or candle. However, this approach is not the best. There are times that we see gaps in the market. Gaps increase the volatility of the market but this approach does not take them into consideration.

Welles Wilder suggested an approach that could not only consider the gaps but consider the effect of the previous bar's close on the volatility. The method is very simple (see image).

To calculate the true range of a bar you need to consider three values.

• H - The high of the current bar
• L - The low of the current bar
• C - The close of the previous bar

Then you need to calculate the absolute (or rather the positive portion) of the H minus L, H minus C, and L minus C.

• D1 = | H - L |
• D2 = | H - C |
• D3 = | L - C |

True range of the current bar is the maximum of D1, D2, and D3. If there is no gap prior to the current bar and also if the size of the current bar is long enough then True Range is equal to range. However, there are cases that True Range would be larger than range.

Average True Range Indicator

Average True Range is a moving average of True Range over a number of sessions or rather a number of bars or candles. The default value suggested by Wilder is 14.

Many Forex brokers do not like the original ATR as it shows the price range. In Forex price range is usually a decimal number less than 1. For example: 0.0014 or 0.32 or 0.0316. This makes the job of reading ATR rather difficult.

If we show ATR in Pips then reading ATR is easier. For example the preceding numbers could be 14, 32 (if the pair is a Yen pair), and 316 respectively.

Average True Range in Pips Indicator [download]

I have developed a version of ATR which shows the values in pips. The indicator works in MetaTrader environment. Click here to download your free copy. As you can see in the following image, this indicator is exactly the same as the original ATR. The only difference is how it shows the value of ATR.

If you do not know how to install and use a custom indicator click here.

If you would like to be able to program custom indicators yourself you need to learn MQL programming. Click here to see the options that you may pick from.

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Relevant Article: Bollinger Bands Width Indicator