ATR is an important technical indicator in financial market technical analysis. Examples include stocks, forex, and cryptocurrencies. It helps investors evaluate the volatility of an asset. Follow Forex Trading to learn about the ATR indicator.
What is ATR?
The ATR indicator is also known by the abbreviation of Average True Range. It is used to measure the price fluctuations of an asset. It assesses the level of risk. At the same time, determining entry/exit points into the market becomes easier. ATR assists in determining entry and exit points and deciding to buy and sell assets.
What is ATR?
ATR can forecast the distance that price may move in the future. Therefore, many traders trust this indicator. The purpose is to make decisions about setting take profit and stop loss points.
It was Mr. Welles Wilder who created the popular indicator series. Examples include RSI, ADX and Parabolic SAR, which is also the developer of the ATR indicator. In the early 1980s, the stock market became more volatile. He conducted research and developed ATR to accurately measure these fluctuations.
The ATR indicator was first introduced in the book “New Concepts in Technical Trading Systems”. This is where it is mainly applied to commodity markets. However, after that, ATR was widely used. Especially in trading stocks, indices, as well as Forex and cryptocurrency markets.
Meaning of the ATR indicator
Thanks to the average volatility line of the ATR indicator when learn forex technical analysis, traders and investors can:
- Set stop loss and take profit points flexibly: the case of a positive trend. Traders can determine take profit and stop loss points by the trading strategy. When combined with a trend-following Trailing Stop order, traders can optimize profit margins.
- Determine the reversal point: on the ATR indicator. Traders can spot areas of high buying and selling pressure. Where the possibility of reversal is high. ATR value increased. This shows that the market is experiencing strong fluctuations. It is a sign that a reversal may be coming.
- Identify strong reversal signals when ATR crosses 70% of the average value.
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Characteristics of the ATR indicator
Notably, when the ATR indicator has a high value. That means the possibility of a trend change is also correspondingly high. In highly volatile markets, ATR tends to increase strongly. Large fluctuations in price, either a price decrease or a sudden price increase. This will result in a high ATR value, but it usually does not remain stable over the long term.
When the ATR indicator value decreases, it usually occurs when the moving trend becomes weaker. During periods of low market volatility, ATR will decrease in value. If the value of ATR remains low for some time. This can lead to the possibility of a reversal point appearing. Or it may continue to form an accumulation area.
What are the benefits and limitations of technical analysis of ATR?
The ATR (Average True Range) index evaluates price fluctuations. It also considers the difference between the opening and closing prices. Even gaps in price movement. Flexible application on many time frames. Especially useful in short timeframes. For example, M15, ATR. This helps investors make smart trading decisions. They provide information about price fluctuations and assist in determining transaction size. However, ATR is not completely certain about the trend reversal. Furthermore, it can be misleading, especially at market pivots or turning points.
Advantages of ATR technical analysis
Only historical price data is needed to calculate the ATR value. ATR not only takes into account price movements but also evaluates gaps in those movements. On some trading platforms, the ATR indicator can be applied in any time frame. This is very useful for daily trading styles. Especially on small timeframes like M15 – 15 minutes. It makes it easy to find entry and exit points.
As you know, the ATR index helps players identify entry and exit points. It also provides signals about price movements. ATR has the ability to adapt to sharp fluctuations and also consolidation price areas. It can trigger unusual volatility both up and down. By using multiples of ATR, players can catch exceptional price movements.
Defect
The ATR indicator is only a relative estimate. It does not guarantee that a trend reversal will occur.
ATR indicates price direction. It mainly determines the level of volatility caused by price gaps. It also limits upward or downward fluctuations. Therefore, ambiguous signals can sometimes be generated. Especially when the market is at a turning points or when trends are at turning points. For example, a sudden increase in ATR after a large move is opposite to the prevailing trend. It may make some traders think that the ATR is confirming the current trend. But that’s not the case.
Formula to quickly calculate ATR indicator
To calculate the value of the ATR index, we will proceed in 3 steps as follows:
Step 1: Calculate the actual range. We use the Max function to get the largest value of the data. It includes the difference between the highest price and the lowest price at that time. The absolute value of the difference between the highest price and the previous closing price. As well as the absolute value of the difference between the lowest price and the previous closing price.
TR = Max [ABS (H – CP),(H – L), ABS (L – CP)]
In there:
- H is the highest price;
- L is the lowest price;
- CP is the closing price.
Step 2: Calculate the initial ATR value. It should be noted that we often use the default cycle of the ATR index which is 14 sessions.
Step 3: We will proceed to deduce the next ATR values. You use the previous data along with the specified cycle.
Investors do not need to calculate the ATR formula by hand. Because the results of the ATR index are already available on the trading platforms.
How to use ATR
To take full advantage of ATR ‘s potential, traders need to be proficient in applying it to trading.
Use the ATR indicator to determine stop loss points – Stop loss
Usually, we place a stop loss below the bottom of the closest support with a Buy order and above the top of the closest resistance with a Sell order. However, this method may be susceptible to reverse operation. Especially when the market fluctuates strongly when the value of ATR is high. In this case, investors should consider setting the stop loss point further. On the contrary, if the market is less volatile and the value of ATR is low. Setting the stop loss closer may be preferable.
You can choose a multiplier with the ATR rate. The purpose is to determine the size of the stop loss point. For example, if you decide to use 1.5 times the ATR value. The stop loss will be placed approximately 1.5 ATR away from the entry price.
When opening a Buy or Sell position, you set your stop loss at some distance from the entry price. It is determined based on what the value of ATR is.
As the market fluctuates and prices change, the stop loss will move according to the value of the ATR. This helps you protect your position from extreme fluctuations. Before implementing a trading strategy, it is recommended to check it several times to avoid being deceived. (No method guarantees 100% effectiveness). If you notice that the market fluctuates stronger or weaker than usual. You can adjust the size of the stop loss based on the actual market situation.
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How to set Take Profit point using ATR
Depending on what the strength of the ATR signal is, we can determine the appropriate take-profit point. As ATR increases and continues to climb above the upper half of the volatility range. This indicates that the market is fluctuating strongly, with great profit potential. Traders can widen their take profit points to take advantage of higher potential profits.
Conversely, when ATR is less volatile and remains at the lower end of the volatility range. This shows that the market is less volatile. Players can determine a risk/reward ratio of 1:2. At the same time, you set your take profit point there.
How to do forex technical analysis combining ATR and Trailing stop trend orders
Combining ATR and trailing stop is a choice for good reason. ATR helps determine the stop loss point relatively accurately and safely. While the trailing stop order helps maximize profits and ensures profit retention.
After a price adjustment, the player will adjust his stop loss. The trailing stop order will move according to the current price trend. If the price moves in the opposite direction than the player predicted. ATR will act as a standard stop-loss order.
In times of strong market fluctuations, the ATR indicator plays an important role. Especially in supporting the setting of reasonable stop-loss points for trend-following orders. It helps avoid being scanned. When the market is less volatile, the two interact to protect the profits achieved. At the same time, keep the profit intact.
Things you should pay attention to when using the ATR indicator
Determining entry and exit points should not be based solely on an ATR indicator. You need to combine many other tools and indicators to filter out the correct trades. When calculating the expected profit, we can divide it by the ATR value. The purpose is to give the minimum time needed for the price to reach the profit target. Although the standard number is usually 14 for ATR. For example, to measure short volatility, you can use a value from 2 to 10. Also to measure long volatility, from 20 to 50 periods can be used. The ATR indicator is also often combined with other indicators. Examples are ADX, ADXR, or divergence RSI. The purpose is to determine the directional movement of the market.
Epilogue
To summarize, the ATR indicator in technical analysis. The purpose is to help investors know the average moving range of an asset. Thanks to this information, investors can decide what time is ideal. Aim to open or close a transaction. Discover more useful information about the ATR indicator with Forex Trading.
Frequently asked questions about the ATR indicator
How do we use ATR in trading?
ATR is often used to determine risk levels and set stop loss and take profit levels. ATR is used to accurately indicate entry and exit points from the market. As well as to identify trends and determine the level of market volatility.
How to use ATR to stop loss and take a profit?
Traders can use the value of ATR. The purpose is to determine the ideal distance between the entry point and the stop loss or take profit point. Typically, stop loss and take profit points are set at several times the ATR value. Depending on the specific trading strategy and desired risk level.
How to adjust your trading strategy based on ATR when the market is volatile?
When the market fluctuates strongly, traders adjust their stop loss and take profit levels. The purpose is to reflect the higher volatility of the market. Conversely, when the market is less volatile, stop loss and take profit levels can be set closer. The aim is to take advantage of smaller fluctuations in price.
