ATR
Definition
ATR (Average True Range) is a volatility indicator: the average candle range over a period, usually 14 candles, with gaps taken into account. It does not show direction, only the size of the move. In binary options ATR is used to choose the expiration, to filter out a "dead" market and to judge how much larger than usual the current candle is.
How ATR is calculated
First the true range (TR) is calculated for each candle. It is not simply the high minus the low: the gap relative to the previous candle's close is taken into account too. The largest of three distances is used:
TR = max(high − low, |high − previous close|, |low − previous close|)
Then TR is averaged over the period, the standard being 14 candles: ATR = the average TR over 14 candles. In terminals the average is usually smoothed Wilder's way, so the value differs slightly from a simple average, but the meaning is the same.
An example on EUR/USD, distances in points (0.0001), differences from the previous close taken in absolute terms:
| Candle | Previous close | High | Low | High − Low | High − prev. close | Low − prev. close | TR |
|---|---|---|---|---|---|---|---|
| 1 | 1.0850 | 1.0862 | 1.0845 | 17 | 12 | 5 | 17 |
| 2 | 1.0858 | 1.0880 | 1.0855 | 25 | 22 | 3 | 25 |
| 3 | 1.0876 | 1.0882 | 1.0870 | 12 | 6 | 6 | 12 |
| 4 | 1.0872 | 1.0890 | 1.0884 | 6 | 18 | 12 | 18 |
| 5 | 1.0888 | 1.0895 | 1.0860 | 35 | 7 | 28 | 35 |
The average over these five candles is 21.4 points. The fourth candle shows why the true range is needed: the candle itself is short, only 6 points, but it opened with a gap, and the real move from the previous close was 18. A plain candle range would have lost that move.
How to read ATR in binary options
ATR gives no entry signals; it answers three service questions.
- Whether to trade right now. If ATR is noticeably below its average for the last few hours, the market is "dead": candles close a couple of points from their open, and the outcome of a trade is decided by a random tick. Such periods are better skipped entirely.
- Which expiration to take. Price needs time to move away from the entry by a distance that noise will not cover. With an ATR of 5 points on M1 a one-candle trade is a lottery, while three to five candles is already a working signal. The payout does not depend on the expiration time, so the expiration is chosen by the market's range, not by the percentage.
- How much larger than usual the candle is. A candle of 2–3 ATR is an impulse, often followed by a correction or a pause: chasing such a move on the next candle is dangerous. A candle below 0.5 ATR is noise; its wicks and body mean nothing.
| ATR relative to its average | What it means | What to do |
|---|---|---|
| below 0.7 | the market has gone quiet, a flat or night hours | skip signals |
| 0.7–1.5 | normal volatility | trade by the strategy |
| above 1.5 | a spike: news, a session open | reduce the amount or wait for the first correction |
ATR in the terminal
In BinoView Supercharts ATR works inside other tools more often than on the chart by itself. The Flip Strike bot builds its UT line on ATR: it runs at a distance of ATR times a coefficient from price and gives a signal on a crossover, while a volatility corridor made of ATR and its smoothed average cuts out "sleepy" stretches and extreme volatility. In the sequence screener the context panel shows the distance of price from EMA 20 in ATR units: a gap of 3–4 ATR points to a stretched move and a possible return. Level and sweep indicators also set their tolerances in fractions of ATR, so that one setting fits both a calm and a fast market.
How it differs from other volatility measures
Bollinger Bands measure the deviation of close prices from a moving average and show where price is relative to its corridor. ATR says nothing about the position of price, only about the average size of the move, and counts wicks in full. RSI is not volatility but momentum: it compares gains and losses over a period and shows overbought conditions, which has nothing to do with candle size. Together they complement each other: RSI suggests the side, the trend sets the context, ATR decides whether to enter now and for how many candles.
Frequently asked questions
What ATR period should I use?
The standard is 14 candles, and that is what most indicators and bots use. A short period (5–7) reacts to a spike faster but jumps on every large candle; a long one (20–30) is smoother but notices a lull later. For binary options on minute charts there is usually no reason to change 14.
What does it mean when ATR is falling?
Candles are getting smaller: the market is quieting down, most often before news, during the instrument's night hours or inside a narrow flat. On such a market a candle closes a couple of points from its open, and the trade result is decided by noise. Signals during a falling ATR are better skipped, or you wait until ATR returns to its average.
Can ATR show direction?
No. ATR measures candle ranges in absolute terms: a 20-point candle up and a 20-point candle down give the same value. Direction is shown by moving averages, trend structure and oscillators such as RSI. ATR answers only one question: whether it is worth trading at all right now and which expiration to take.