I started to think recently about the ATR indicator and how it may be useful in markets that open and close. However, it seems to me the indicator is completely flawed at measuring volatility in the Forex markets. My theory behind this opinion is the simple fact that the Forex markets are open 24 hours a day. So how could averaging the low volatile hours before a major market open (New York, London, or Asia) be relevant?
Traders who are well versed in Forex understand that even though the markets are open 24 hours a day there are best trading hours for different strategies. This is simply due to the fact that there exists common low volatile hours and common high volatile hours. For instance the New York and London opens you can expect the Forex markets to move.
So when I decided to create this indicator I had to think of what variables I would be measuring. It was then I came up with the following theory. Why not measure the average range of the same hour over a period of look back days. Then take the average range of the current bar and compare it to the average that it was expected to move that hour based on x historical look back days. This seemed much more relevant to me. So that is exactly what this indicator will do.
White Line – The range of the current bar (moving average of one bar)
Blue Bar – Means high volatility. If a bar is blue it means the market has moved 150% in that hour than what it was “expected” to do.
Red Bar – Means low volatility. If a bar is red it means the market has moved 50% in that hour than what it was “expected” to do.
Green Bar – Normal market volatility. If the bar is green then the range for that bar falls between 50% and 150% of its expectancy.