The ATR, or Average True Range, is a technical analysis indicator that measures the volatility of an asset. That's all it does. It doesn't give you a measure of the trend direction like the Alligator, for instance.
It was introduced by Welles Wilder, in his book entitled "New Concepts In Technical Trading Systems". Wilder is also credited with developing the RSI and Parabolic SAR indicators.
Wilder developed this indicator to measure the volatility of commodities like gold and platinum, but it can be used for stocks and indices.
Take a look at the image below that shows the volatility of the l'Oréal stock.
As you can see above, the stock is experiencing low volatility, as shown by a downward-facing ATR. When the asset is stable, the ATR hovers near the bottom, as seen just to the left of the sharp increase.
As was previously mentioned, the ATR is primarily used for commodities, but also for indices and stocks. If you're into trading this kind of stuff only, like Amazon (AMZN) or Apple (AAPL), then the ATR might come in handy.
Entering trades after the period of low volatility is what a stock trader looks for.
Lengthening the ATR period makes it more precise, whilst shortening it makes it less accurate. However, this will give you more signals. By default, it's set at 14, as shown in the image below.
In conclusion, as a trader you need to remember that the ATR does not give you the trend direction, but only the volatility. For the direction, it's best to use an indicator like the Alligator. Read more here.
RISK WARNING: YOUR CAPITAL MIGHT BE AT RISK
Welles Wilder also developed two other indicators, which you can also find on IQ Option. These are the RSI and Parabolic SAR. You can find the full list of indicators at your disposal on the platform by clicking here.
Let's learn more about the RSI, shall we ?