Relative ATR Vertex FX plugin


Active Trader
Aug 8, 2015
Relative Average True Range indicator, also termed as RelativeATR is VertexFX indicator which is an enhanced adaptation of the Average True Range (ATR) indicator.

The Average True Range indicator by itself is very handy to identify the strength of the trend and its continuity. It is also used to define stop loss levels and intermediate profit targets. Many short-term traders use a multiple of the Average True Range to setup the initial stop-loss. As an example, a multiplier of 2.5 for the Average True Range is very popular as the initial stop-loss.

However, one of the biggest disadvantages of the Average True Range indicator is that it does not display the strength of the current trend from a historical perspective because it is displayed as an absolute value in terms of price. As a result, it is difficult to predict if the trend is in continuation mode or reversal mode.

Relative ATR indicator is an improvement over the Average True Range indicator by providing a relative perspective of the trend. The idea behind the RelativeATR indicator is that it calculates and plots the current ATR with respect to historical ATR. Therefore, compared to the Average True Range, it provides an enhanced perspective of the strength of the trend. If the price is rising (or falling), the ATR will rise, however the trend may not be strong enough to enter a trade. The RelativeATR identifies such tricky trade setups.

The RelativeATR is expressed as percentage between 0 and 100, and is calculated as follows,

(a) In the first step we calculate the Average True Range of the current candle over the recent ATR_PERIODcandles,

(b) In the next step we calculate the largest and the smallest Average True Range over the recent LOOKBACK candles.

(c) We then calculate the RelativeATR as,
RelativeATR = 100 x (ATR – LowestATR) / (HighestATR – LowestATR)
The THRESHOLD_LEVEL parameter specifies the strength of the RelativeATR. When the RelativeATR is below the THRESHOLD_LEVEL it is displayed in red, whereas when above the level it is displayed in green signifying strong trend.

When RelativeATR is rising, it implies the trend is stronger compared to its historical price movements. At the same time, when RelativeATR peaks and starts falling it implies the trend has weakened, and the price has entered consolidation or reversal. This indicator should be used in combination with other trend indicators like MACD and RSI for confirmation of the entry signals. A trader can enter in the direction of the trend when the RelativeATR turns green from red and is rising. The trade should be closed when the Relative ATR has peaked and starts falling.