The atr indicator is one of the basic tools for any trader. It allows you to assess the potential for profit on a trade, determine if the price has potential to move, and filter out false entry signals.
Content:
- What is the ATR indicator and how does it work?
- How to correctly set the ATR indicator?
- Using the ATR indicator.
What is the ATR indicator and how does it work?
The atr indicator translates to the average true range that measures the volatility of a trading instrument. Shows how much distance in points the price travels on average per day.
Forex trading advice often recommends the use of ATR. What is the reason for this?
- ATR allows you to understand if the price has the potential to go up or down. For example, the price goes from 60 points per day. If at the time of opening a deal it has passed 10 points, then purchases are still possible, there is room for growth. And if 40 points have already been passed, even if there is a signal to open a position, the quotes may not reach the take profit.
- False input filter. This ATR function is derived from the previous one. If a trader receives a signal from a trading strategy to open positions, but the price has already exceeded more than half of the daily ATR, it is not worth opening a trade.
- Guideline in placing stop orders. There are two ways to determine the stop loss on a trade: technical and calculated. Technical involves moving a stop order past the local high or low, or beyond the technical level. For intraday trades, the stop loss can be calculated based on the ATR – take 20%.
How to correctly set the ATR indicator?
In Metatrader 4/5, the atr indicator is a basic tool for market analysis. It is located in the “Indicators” tab.
The ATR can also be determined manually. Sometimes this method is the most accurate. Here is a simple algorithm:
- It is necessary to decide during which period the ATR is measured. It is usually taken within 14 days.
- For manual determination, you need to select any segment of 14 candles on the daily timeframe. It should not contain the extremely large paranormal candles that often form in the context of the news.
- The average bar of the sample is selected by eye. This will be ATR.
- We measure the candle with a cross and get the size of the range in which the price will move during the day.
The next way to find out the average true range at the moment is to install the ATR indicator in Metatrader.
In the settings window, leave the default period (14) and press the install button.
The indicator line appears below the graph. Despite the fact that ATR in Metatrader is located in the oscillators tab, it is a mistake to consider it as such. It does not show the reversal of the market and its volatility:
it is a change in the range of price fluctuations over time.
By hovering over the ATR curve below the chart, you can see what the average true price range is now, and from the direction of the indicator, you can understand if volatility is increasing.
Some forex trading robots take the ATR value into account when determining the entry point for a trade.
Using the ATR indicator
The Forex game begins to generate stable profits with a systematic approach to trading, working according to a profitable strategy. Must include:
- signaling criteria to enter a trade;
- rules for limiting risk and placing a stay order;
- the ratio of potential profit and risk in a position.
ATR can help with all of these steps.
- Use ATR to filter out false signals from the strategy: if you go over 30-40% of the average daily range during the formation of the entry point, it is better not to open this trade.
- Set your stop loss in the amount of 15-20% of the average true range and use the remaining 80-85% as a power reserve.
The use of this tool when trading cannot be independent. Day trading involves analyzing the market using technical tools (price levels and trends), candlestick patterns, indicators: trend and oscillators. And only then is ATR added to help complement and clarify them.
