ATR: Reading Volatility

As buyers and sellers pass through the marketplace throughout the course of a trading session, the price charts will simply reflect the behavior of the two opposing forces, and their varying waves of strength and weakness. Like ocean currents, the market will oscillate between relative degrees of volatility and direction. Volatility decreases and trading ranges develop as the market inhales to absorb capital from both buyers and sellers. Eventually price action break's out as the volatility increases, and the market exhales in the direction of least resistance. The ATR (Average True Range) gauges the average range from low to high of each candlestick during its respective period of time. In the first segment of the following chart, we can see a trading range develop as the ATR indicated a decreasing amount of volatility. Eventually as the market became complacent, one side of the market took control; in this case the sellers, as a breakdown occurred to new low prices. Understanding this basic mechanism can help us understand when it is a good time to 'play the range'; as volatility decreases, and 'buy the breakout' as volatility increases.