As we said, critical success in trading is to maximize profits and minimize risk.
The Average True Range Trading strategy helps you achieve that. The Average True Range (ATR) indicator helps you to reach the goal. Now I will show you how to use the ATR indicator for accomplishing two things:
- To measure stop loss placement.
- To measure profit targets.
The Average True Range strategy applies very successfully to any intraday time frames and more significant time frames too. It works on different asset classes as well. The main goal of the True Range strategy is to trade when the market is ready for acceleration.
We need to identify how much the price moves on average, for achieving consistency in trading. That is why we want to use the Average True Range indicator.
Now we have to define the Average True Range indicator.
To put it differently, the ATR indicator is measuring the volatility of price changes of any market or security. In that sense, the Average True Range is a universal indicator. The index is working in the same manner as the Forex currency market, commodity market, stock market, and so on.
The Average True Range indicator is set to 14. The ATR indicator will show the average volatility from high to low over the past two weeks if you are on the daily chart. The ATR indicator will display the average volatility over the past 14 hours if you are on the 1h chart.
In the top right-hand corner of the ATR indicator window, the ATR indicator will display the volatility value.
The best average exact range period for trading is 10. The absolute number of measuring the volatility is ten sessions or ten periods.
The Average True Range Indicator
The Average True Range indicator is a crucial indicator. If you use it the right way, it will decrease your losses and grow your profits. There is the biggest misconception of the ATR indicator: some traders mistakenly believe that lower ATR value means a bearish trend, and a higher ATR value means a bullish trend.
Nevertheless, the Average True Range indicator doesn’t say anything about the trend direction.
However, to some degree, we can determine the market trend with the help of the best average exact range Forex strategy. That can be quickly done by looking at the overall Average True Range value relative to the trend direction.
Now I will demonstrate how the ATR volatility changes notably during the different stages of the trend.
During uptrends, the Average True Indicator tends to post lower volatility. Thus, the ATR indicator tends to display higher volatility during downtrends.
The old trading aphorisms that say the market takes the stairs up and the elevator down. That is how the market has functioned for centuries.
Now I’m going to introduce you to an unconventional way to do technical analysis. I’m going to apply the 20-day moving average over the Average True Range indicator. Most of the platforms will allow you to accomplish this. One of the platforms is TradingView.
On the TradingView platform, after attaching the ATR indicator, you can move the mouse cursor over the Average True Range indicator window. There you right-click and select “Apply Indicator on ATR.” There will pop up another window where you can choose a Moving Average using 20 periods.
That is the unorthodox approach to trading.
Now its time for a real demonstration of how the Average True Range indicator works.
The Average True Range trading strategy
The ATR trading strategy has a configuration of the chart with two windows:
- The first window must contain your favorite currency pair.
- The second window must contain the Average True Range indicator (with the 20-EMA attached to it).
If the breakout in the ATR indicator is reading above the 20-EMA, then a higher volatility will come. A higher volatility means more significant profits and trading opportunities to be made. It can be high proof of a new trend if the break of the ATR line is above the 20-EMA.
When the Average True Range line is above the 20-EMA, we want this to be followed by a price break as well. We want to see a big bullish candle relative to the previous candles popping up on the chart in case we are looking to buy it. In case the price is breaking up and is accompanied by a break higher in volatility, there is a higher probability of the market to move in the same direction.
Now all that’s left is to establish how to enter the trade.
You will have to wait until the breakout candle is developed, depending on your preferred time frame. Then enter long once the next candle is breaking above the high of the breakout candle.
That is the key to the success of the ATR trading strategy. You need to have a big, bold candle to confirm the Average True Range breakout. The Average True Range indicator will break many times above the 20-EMA, and you will learn that soon. It would not be confirmed by the price action in which case you do not want to execute any trades.
When it comes to establishing profit targets, the Average True Range indicator is a great tool to use.
To determine your take profit, targeting the ATR indicator can be of great help. That is self-explanatory in case you know how much, on average, the market is prone to move. Then we want to conform to this reality and have that as a goal.
For example, let’s say that we see the Average True Range volatility reading has a value of 16 pips.
That means that our profit needs to be calculated 16 pips above the high of the breakout candle. The upper of the breakout candle is at 1.1255 and adding to that 16 pips price, we end up with a profit target at 1.1271.
Nevertheless, it is not over until you know where to place your protective stop loss. That brings us to the last step.
Remember this: in trading; you have to learn to hide your protective stop loss at the most logical point and protect your back. When a break is below the breakout candle low, it will negate our trade idea. That is the exact place where we want to hide our loss of protective stops.
As you know, the Average True Range Trading strategy provides us with an unorthodox approach to trading. It combines both the price action and volatility to provide us with the best trades possible. I hope that by now, you are sold on to the idea of the Average True Range indicator’s ability to forecast the market with a high degree of accuracy.
Please don’t forget to read our previous articles, which are very helpful: Bitcoin as one of the Cryptos: Information and Steps Part I; The Cryptocurrency Trading: Information and Steps PART II; and Today’s Topic: Chart pattern, Support and Resistance Levels. In Part I, you will read about how bitcoin works and the on-balance volume and bitcoin. In Part II, you will become familiar with the way to reduce risks of trading and the breakout trading strategy. Finally, the last section includes Chart pattern and Support and Resistance levels.