The Average True Range (ATR)

Filed under: Learn Forex Trading |

An indicator that we have not really given a mention to thus far is the average true range, or more commonly known as the ATR.

 

In forex, the ATR gives you the figure, in pips, of the average price movement over a given number of days. For example, if you are working with an ATR (14), then you are looking at the average price movement over the past 14 days. What the ATR does is tell you about the volatility of the market. This is valuable information. If the ATR is a high number, then it tells you that the market is volatile and moving quite a lot. If the ATR is low, it tells you that the market is fairly quiet and is not moving very much.

 

Figure 1.

Figure 1 shows you a chart with the ATR indicator added to it. Where the candles are larger, the ATR moves up, and where the candles are shorter, the ATR moves back down. The ATR can also be useful for calculating stop losses. This is because if the market is volatile, then it is useful to have wider stops, and if it is less volatile, then you can have tighter stops and thus a higher risk-reward. The famous ‘turtle traders’ used the ATR to place their stops, and used a 2ATR (or two multiplied by the ATR figure) stop loss on their trades. This was instrumental in their success as it considered the volatility of the market. Do you? Probably not – which is why the ATR indicator is such a useful tool.

 

Another option is to use an ATR trailing stop, which allows you to catch more of a trend. However, for this you would need a custom made indicator, which you would either have to find or code yourself.

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