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Average True Range

Last but not least, one of my favorite indicators, the Average True Range or ATR for short. Unlike the other two Oscillators the ATR is useful in anticipating potential rises or falls in volatility. Also unlike the other two, there is no oversold or overbought levels. If the ATR is high it suggests volatility is high. Conversely, if the ATR is low it suggests volatility is low.

How can we use this to predict volatility? We know, of course, that volatility is cyclical. Thus we can assume that when the ATR is at record lows for a prolonged period (point F) it’s a signal that a spike in volatility is coming. And, indeed, we can see volatility did come and we got the big spike.

If we decide to use the support as an entry signal we can ATR to gauge whether there’s a chance our buy trade will have a strong momentum. If the ATR was at a record high when we decide to buy that would have been a cautionary note. Not to entry but because it signals that volatility might fall and that means momentum might have been weak. The same principle, of course, works for a sell signal.

ATR Average True Range

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