Volatility measures the rate at which price moves. Volatility indicators like Average True Range (ATR) help to gauge the state of the market; to know the strength of the trend, possible breakouts and potential market reversals.
How to measure Volatility using Average True Range (ATR)
ATR measures volatility by showing the average trading range of the market for a given period of time. It grows along with volatility and falls with it.
When ATR is rising, its shows that volatility is also rising whereas when it is falling it is an indication that volatility is dropping down.
Using this indicator you are able to tell when price is trending or ranging and you can use it to determine possible breakouts basing on the strength of volatility. This can also be used to set stops and targets after a trade has been taken.
Take a look at the AUDUSD, Daily chart below;
From the above chart we notice that as the ATR indicator rises price also responds and as it falls, price starts to congest which is a sign of fall in volatility.
This can be relied on to identify entry and exit levels in the market.
As price gets out of congestion, the ATR indicator starts to rise which is an indication for an increase in volatility so this would be a good time to take a position. If ATR was rising and then starts to fall, it indicates a change in volatility and this sends a warning to exit trade or prepare for a market consolidation.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...