Table of contents:
Using Atr (average True Range) For Calculating Potential Profits – There are several different classes of indicators that traders can use. And based on specific goals, such indicators can help in the entire decision-making process. Most traders are familiar with momentum based indicators such as RSI and Stochastics.
But there are also other types of indicators that are based on volume, volatility, cycle, or some other measure. In this lesson, we will discuss a specific trading indicator that measures the volatility of a currency pair. It is called the Average True Range indicator, which is commonly called ATR.
Using Atr (average True Range) For Calculating Potential Profits
The Average True Range is a single line indicator that measures volatility. The indicator was originally developed by J. Welles Wilder to measure commodity volatility in the futures market. ATR does not measure price trends or price direction like other common indicators like MACD or Momentum indicators. In contrast, the ATR indicator only shows when volatility is high and when it is low.
What Is Average True Range (atr) And How Is It Used?
This is an enlarged view of the ATR Indicator, which is usually placed in a separate window below your chart. The single line of the ATR indicator fluctuates in the range. A high print of the ATR line indicates that the market is experiencing high price volatility. On the other hand, a depressed ATR level indicates that price volatility in the market is relatively low.
Traders can use prints of the ATR line to consider entry and exit points based on price volatility. When volatility is high, Forex pairs are likely to be dynamic and faster. In contrast, low volatility is associated with quiet markets or periods of consolidation.
Although the ATR indicator is not as widely used by retail traders as some other momentum-based indicators, it has an important purpose for volatility-aware traders who are interested in gauging the current level of volatility or trying to anticipate potential price breakouts. Experienced traders are aware that the market moves from periods of low volatility to high volatility and back again. As such, ATR is an invaluable trading tool for those who can appreciate these ups and downs in the market.
To calculate the Average True Range, you need to identify the period True Range on the chart.
Atr Cheat Sheet
To find the True Range on the chart, you need to do three calculations and take the one that gives the highest value:
The highest result of these three formulas gives you the actual True Range on the chart. When you get the True Range, you should average the values for the period on the chart. The average calculation is done using the Exponential Moving Average on the values.
Fortunately, most trading platforms offer the ATR indicator as a tool and will calculate this value automatically. So, there is no need to do all these calculations yourself, but it is important to understand how the indicator is built so that you can use it effectively. The standard Average True Range formula uses the 14-period EMA indicator. However, you can manually adjust the time taken into account. The indicator then recalculates based on the new input.
As we touched on earlier, the ATR indicator can be used to perform volatility analysis on the chart. Average True Range tells you when volatility is high and when it is low. One of the best applications of the ATR volatility indicator is that it can help you place your stop loss orders in a way that is consistent with the current market conditions. Basically, it will help you to avoid placing stops too tight during periods of high volatility and placing stops wide during periods of low volatility.
What Is Average True Range?
In addition, it can help you establish a greater possibility of making a profit. For example, If ATR has a relatively high reading, you can consider staying in the trade for a large target in the expectation that increased volatility can lead to a larger profitable price move.
In the example above you can see the EUR/USD chart for February 2016 – February 2017 with the ATR indicator attached below. The red arrow in the ATR indicator points to times when the value is relatively high, which is associated with high price volatility. Notice, the large volatile candles on the high price chart at this corresponding time.
On the contrary, when the ATR reading is low, the market is relatively quiet because it has entered a period of low volatility. The candle is small, the price map is calm, and EUR / USD is consolidating instead of moving directionally. When volatility is low, you can adjust your Stop Loss order tighter. At the same time, your target should also be smaller, because the price is not expected to move.
The ATR indicator can also be used to project future trends. If you notice that the ATR line is steadily trending higher, then you can assume that volatility is likely to remain high. And for the steady sloping ATR, we can expect a bound type environment in the near future. At the same time, you should be on the lookout for a transition from low to high volatility or high to low volatility to prepare you for changes in market conditions.
Average True Range: Atr
Learn What Works and What Doesn’t In The Forex Market….Join My Free Newsletter Packed With Actionable Tips And Strategies To Make Your Trades Profitable….. Click Here To Join
The ATR indicator is built into the MetaTrader 4 trading platform – the most used Forex trading terminal. To activate the MT4 ATR indicator you simply need to go to Insert > Indicators and select Average True Range. The indicator is then attached to your chart with the default average setting – 14-period Exponential Moving Average.
If you want to change this setting, you need to drag the mouse cursor to the indicator at the bottom of your chart and click the right mouse button. Then you will select “ATR (14) Properties…”, which will open this pop-up window:
Then in the “Parameters” tab, you will see a field called “Period”. Simply change the default value of “14” to the desired setting. The new settings of the MT4 ATR indicator will be applied automatically.
The Complete Guide To Average True Range Indicator
Since ATR is primarily a study of price volatility, it cannot be used as a stand-alone tool for market trading. You will use it in combination with your trading methodology to set up your entries, stop loss placements, and profit targets.
One of the most effective ATR strategies is one that includes price action analysis and Trailing Stop Loss orders based on the ATR value. You can use price action patterns as entry signals on charts. These can be chart patterns, candlestick patterns, trend lines, trend channels, etc.
Once you have entered the trade, you can use ATR based on trailing stops. The point is to use the value of the Average True Range indicator to determine the distance you want the price to run. When the price action moves in your favor afterward, the stop loss will also move along with the price taking into account the distance you have set from the current price.
However, if the price action moves in the opposite direction to your trade, the ATR Trailing Stop will remain fixed. As such, an ATR trailing stop will help provide a looser stop as the price moves in the direction of your trade, allowing you to extract the maximum amount from the market if there is a persistent trend.
How Average True Range (atr) Can Improve Your Trading
There are simple rules for determining Stop Loss in ATR trade management approach. If the ATR indicator line is in the upper half of the area, you can consider the currency pair as relatively volatile, putting a looser Stop Loss order in the market. If the ATR gives a value that is in the lower half of the indicator, then you can use a tighter Stop Loss order, because the price is relatively less volatile than normal.
Now we will discuss some simple guidelines to manage your exit using the ATR indicator. If the ATR line is in the upper half of the indicator during your trade, you can consider multiplying the minimum potential of your pattern by 2. This means that you can try and hit the target twice as usual for the pattern. You may want to use the scale out method when doing this or decide to exit a full position on a larger target.
On the other hand, if the ATR line is in the lower half of the indicator, then you may be targeting only the minimum potential of the pattern. The same idea is in force if the ATR line is continuously trending up or down. If you enter a trade where the ATR is in the lower half, but the line is going up, you can still consider a double target option on the chart.
Let’s say the price breaks the triangle pattern in a bullish direction. As a result, you decide to buy each Forex pair on the assumption that the price is increasing. The triangle pattern rule states that you should stay in the market
How To Trade With Average True Range (atr) Indicator: Setting And Signals
Average true range percentage, using atr for stop loss, atr average true range, average true range explained, average true range trading, what is average true range, atr average true range definition, calculating average true range, atr true range, average true range indicator, average true range stop loss, average true range