Technical indicators not only help traders identify trends and find entry points but also help set stop loss and take profit points. Among them, ATR, or average true range, is one of the typical examples. This article, Forex Trading will guide you to clearly understand what is ATR and how to apply it in forex trading.
Learn in detail about what is ATR.
The ATR indicator is used to measure price range and market volatility. This is an important tool that every trader needs to understand when participating in the foreign exchange market.
What is ATR? Meaning of the ATR indicator
ATR stands for “Average True Range” which means “average actual range”. It was developed by J. Welles Wilder Jr. The Average True Range indicator was born in 1978. The original purpose was to measure price fluctuations caused by gaps in price (GAP) or limit movements.
Initially, ATR was applied mainly in the commodity market. However, it has now become a popular tool. Widely used in the foreign exchange market.
So the meaning of what is ATR? The purpose is to help assess price fluctuations accurately. It provides information to determine take profit and stop loss points. From there, optimize profits and minimize risks for investors. In addition, based on price fluctuations, traders can also easily make decisions about appropriate entry and exit points.
When ATR is high, this usually indicates a fairly sharp increase or decrease in the market in a short time. Conversely, when the ATR indicator is low, the market is usually less volatile. If the market remains quiet for too long, it may indicate that it is in an accumulation phase. There is a possibility of a reversal in the future.
In addition, ATR is very important when trading the Swing Trading Strategy. It can help identify potential Swing points by measuring market volatility.
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Learn the formula to calculate ATR
After learning the concept of what is ATR, traders next need to know how to calculate ATR. Specifically, the ATR calculation process includes 3 steps as follows:
Step 1: Calculate True Range (TR) according to the following formula: TR=Max[(H−L), Abs(H−CP), Abs(L−CP)]
In there:
- H is the highest price,
- L is the lowest price to date.
- Abs(H−CP): Absolute value of the difference between the current highest price and the previous closing price.
- Abs(L−CP): Absolute value of the difference between the current lowest price and the previous closing price.
Based on the 3 calculated values above, we choose the largest value called True Range.
Step 2: Calculate the first ATR using the formula:
In there:
- n=14
- TRi is the index with the largest value in the amplitude region.
Step 3: Calculate the next ATR using the formula: ATR = [(First ATR x 13) + Current TR ]/14
Although the formula for calculating ATR seems complicated, traders do not need to go through these calculation steps. Because this indicator has been integrated on trading platforms. The introduction of the ATR formula is intended to help traders better understand the nature of this indicator.
How to read the ATR indicator
Explaining the values of the what is ATR indicator is quite simple. ATR moves up and down depending on larger or smaller price movements. Every time a period passes, a new ATR index is calculated.
On the daily chart, ATR is calculated every day. While on the five-minute chart, the ATR value is updated every five minutes. All these values are recorded to form a continuous line. To help traders observe market fluctuations over time.
Markets often fluctuate between periods of high volatility and low volatility. ATR is a tool that helps traders track these changes. When the ATR line increases, it shows that the volatility of the underlying asset is increasing. Conversely, when the ATR line is decreasing, the volatility of the underlying asset is decreasing.
Understanding this volatility helps traders set price targets in the market. For example, if the GBPUSD currency pair has a daily ATR of 150 pips for the last 14 sessions (i.e. 14 days). Now the price target below 150 pips can be achieved in the current trading session.
How to install ATR Indicator Trading
Below are specific steps that traders can refer to:
- Step 1: Open MT4 software and log in to your trading account.
- Step 2: On the horizontal toolbar, select Insert >> Indicator >> Oscillators >> Average True Range.
- Step 3: Set the parameters in the dialog box displayed after you have selected the Average True Range indicator.
In this dialog box, you can configure the parameters for the indicator as follows:
- Parameters: The Period section has a default period of 14. However, you can flexibly adjust it to fit your analysis time frame. Besides, you can also change the color and thickness of the ATR line on the chart in the Style section.
- Two items Levels and Visualization: You can leave them at the default settings.
After completing the settings, just click OK. The ATR indicator will be displayed on your price chart.
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How to use the what is ATR indicator? Detailed instructions
To trade effectively with the ATR indicator, traders need to clearly understand how to use the what is ATR indicator. This will help them apply flexibility to their trading strategies.
Use ATR to set stop-loss points
Usually, we place a stop loss just below the nearest support peak for a Buy order. Stay above the nearest resistance peak for a Sell order. However, this can lead to stop losses being triggered in many cases. The ATR indicator can help traders determine where to place stop losses based on market volatility at a specific time.
- When the market is highly volatile (high ATR), traders should set a further stop loss point.
- When the market is less volatile (low ATR), set the stop loss closer.
This can be considered a safer way to set stop-loss points. It is based on market fluctuations. Traders can learn more about pull back meaning to understand more about the market situation.
Although this approach helps minimize the risk of stop loss being triggered. However, you will not be able to avoid it completely. Therefore, to be effective, traders need to perform many tests before applying them to a trading strategy.
We have seen how ATR can help determine clear and effective stop losses. Using the ATR value to adjust the stop loss point helps protect safety. At the same time, it also minimizes the risk of stop loss being triggered.
what is ATR’s how to set the Take Profit point with an indicator?
Using ATR to determine the take profit point can be done as follows:
- When ATR stands at the upper part of the oscillator: The ATR line is rising and moving above the oscillator. This shows that the market is experiencing strong fluctuations. With such large fluctuations, the profit potential is also high. Traders can expand profit-taking points to take advantage of maximum profits.
- When ATR stands at the lower part of the oscillator: ATR moves low and long. This shows that the market is experiencing slight fluctuations. In this case, traders should set the take profit point to a minimum level. Aim to ensure a risk: profit ratio of 1:2.
Trading strategy that combines ATR with Trailing Stop
Combining ATR and Trailing Stop is an effective approach in trading. ATR helps determine the Stop Loss set point relatively accurately. Trailing Stop has difficulty setting a safe SL point to avoid triggering stop loss while still preserving profits. Therefore, using both tools together will help traders solve this problem.
When the market fluctuates strongly, ATR will assist Trailing Stop in determining the appropriate SL point. The goal is to avoid being triggered by a stop loss. Conversely, when the market is less volatile, both tools will work more effectively.
Currently, on Tradingview many strategies combine ATR and Trailing Stop in trading that traders can refer to. Among them, the ATR Trailing Stop Strategy is a typical example. All information from the process of executing and closing Buy/Sell orders is presented. It shows visualization as shown in the chart.
Conclude
Above Forex Trading has shared with readers detailed information about the Average True Range indicator. Hopefully, that has helped you better understand the concept of the what is ATR indicator. At the same time, understand better how to install and use it in forex trading. Wishing you traders will always achieve more success in the forex market!
Frequently asked questions
What is the way to calculate ATR?
ATR is calculated by taking the largest of three calculations based on the difference between the highest and lowest prices. Highest price and previous closing price. And is the lowest price and previous closing price.
Why is ATR important in trading?
ATR is important in trading because it helps traders measure. At the same time, evaluate the level of market volatility. From there, make appropriate trading decisions.
How many different time frames can ATR be applied to?
ATR can be applied to any time frame. From short time frames like 5 minutes to long time frames like daily or weekly.
