# How to Trade Using the Average True Range Indicator

The metric is used in trend strategies to assess the probability of a trend reversal and determine the moment the price exits the flat. It also serves to set stop loss and take profit orders and is used to estimate the width of the interval when trading using channel strategies. If you have any questions, the ATR indicator is explained in this article. Although the indicator doesn’t show the price direction, it can help to define entry points.

1. However, the price was already close to the higher Keltner channel at the time of the breakout because the bullish trend had already been going on for a while.
2. As you can see from the above chart example of Apple, the average true range moves lockstep with the price action shifts from highs to lows.
3. The ATR stop, often referred to as the “chandelier exit,” involves placing a trailing stop under the highest high the stock has reached since entering the trade.
4. However, if an asset typically maintains an ATR close to \$1.18, we usually say it is performing normally.

Since the price is already up substantially and has moved more than the average, the price is more likely to fall and stay within the price range already established. Once you figure out the highest value, you’ll use that in your calculation. If you were looking at a 14-day period, you’d look at which 14 days of data had the highest numbers. Then you’d add them together and divide by 1/n, where n is the number of periods.

## How to Use the Average True Range Indicator

Thanks to the metric, you can not only monitor volatility and make forecasts but also track divergence signals. So, if on the chart, the price forms new highs when the ATR line decreases (or lows and the line rises), most likely, there is a divergence in the market. That is, traders lose interest in the movement and are not confident in the continuation of the trend. But if the price creates new highs and the ATR demonstrates the same, it means that trading participants are confident in the continuation of the current tendency. On a one-minute chart, a new ATR reading is calculated each minute.

## How to Trade Using the Average True Range Indicator

Here, utilizing stock trade alerts as part of the strategy can help traders respond more promptly to market changes, offering a solution to some of the ATR’s limitations. Conversely, a smaller ATR in less volatile markets allows for a tighter trailing stop-loss, enabling close tracking of price movements and securing accumulated gains. The key advantage of combining ATR with trailing stop-loss strategies is its ability to adjust stops based on prevailing market volatility. In high-volatility markets, a wider trailing stop-loss, indicated by a larger ATR, helps prevent premature sell-offs caused by normal market fluctuations. This approach ensures that stop-loss triggers are driven more by significant trends rather than routine price swings. Over a 14-day period, TSLA’s stock has displayed a wide range of high-low movements, indicative of varying volatility levels.

From the above image, we can conclude that the larger the range of the candles, the greater is the ATR value and vice versa. The calculation of ATR is done by using the following 1 of 3 methods that depend on how the candles are formed. ATR was first introduced for use in commodities markets but now https://forex-review.net/ it is applied to all types of securities. The key to making money is buying a stock for less than what you sell it for. We have been trading for over 15 years and during that time, tested hundreds of resources and… The relationship between the candle size and the ATR becomes very clear this way.

Welles Wilder Jr., also known for the Relative Strength Index (RSI), designed ATR to measure market volatility. Unique from many indicators, ATR doesn’t predict the direction of price changes but quantifies how much interest or disinterest there is in a market move. Traders can set appropriate stop levels based on the ATR value, ensuring that they have a clear exit strategy in place. ATR’s ability to adjust to changing market conditions allows traders to stay on top of evolving trends and make informed decisions. One of the key benefits of ATR is its ability to help traders manage risk.

## Using the ATR for the stop loss

This will ensure that all aspects of price action, trend, and market volatility are covered for a comprehensive trading strategy. Traders should exit a buy trade if the price closes more than one ATR value below the latest closing price. In case of a sell trade, traders are recommended to exit the market if the price closes more than the value of one ATR above the latest close.

An average true range value is the average price range of an investment over a period. So if the ATR for an asset is \$1.18, its price has an average range of movement of \$1.18 per trading day. The ATR indicator is located in a separate box under the chart of the currency pair.

The stock closed the day again with an average volatility (ATR) of \$1.18. The ATR indicator was first described in 1978 by famous technical analyst J. Welles Wilder Jr., the father of several technical indicators, including Relative Strength Index (RSI), Average Directional Index (ADX), and the Parabolic SAR. Once you’ve found a strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge. Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education.

## The Importance of ATR in Trading

Under this approach, when prices move three ATRs from the lowest close, a new up wave starts. A new down wave begins whenever price moves three ATRs below the highest close since the beginning of the up wave. Trading signals fbs forex review occur relatively infrequently, but usually spot significant breakout points. The logic behind these signals is that, whenever price closes more than an ATR above the most recent close, a change in volatility has occurred.

More likely, the price will move up and stay between the daily high and low already established. There is no significant news out, but the stock is already up \$3 on the day. The price has already moved 47% more than the average (\$2.07), and now you’re getting a buy signal from this strategy. Day traders can use the information on how much an asset typically moves in a certain period for plotting profit targets and determining whether to attempt a trade. As previously stated Average True Range does not take into account price direction, therefore it is not used as an active indicator to predict future moves.

## Average True Range Strategies

The same way stock prices will trade in clear trends, so can indicators such as the ATR. Notice in the intraday chart of Apple, both the ATR and stock price were in channels of sorts. The ATR was in a horizontal channel with low volatility, while Apple stayed in a clearly defined uptrend. The key thing to remember when determining which volatility ratio works best for your trading style is to stick to one-time frame.

You cannot compare the 5-minute ratio to a daily value, even for the same stock. The common thread is the timeframe; otherwise, you are comparing apples to oranges. The problem I had with the average true range is that the indicator’s value was different for each stock. Higher priced stocks had higher ATRs versus the low priced momentum players. As you can see from the above chart example of Apple, the average true range moves lockstep with the price action shifts from highs to lows.

## What is ATR in Trading

Standard deviation reflects the price variability relative to a moving average. By knowing that the AUD/JPY moves on average 110 pips per day, traders can use this information for their target placement. Utilizing a target that is 150 or even 200 pips away from the daily open may provide a lower chance of successfully closing a winning trade because the market does not move as much typically.

Calculating an investment’s ATR is relatively straightforward, only requiring you to use price data for the period you’re investigating. However, it is important to know not only their direction but also their strength to succeed. We will look at indicators that can help you in evaluating trends — momentum indicators Forex.