Average True Range - ATR
Low trading range: Candlesticks become smaller
high trading range: Small Candlesticks become bigger
Using ATR to
Produces buy or sell signals with confirming by some other indicators.
ATR's USD/JPY was increasing at from May 4, 2001 to 24 May 2001. It had the highest pick so far. The volatile of USD/JPY is high (Candle sticks had long bodies). At that time, USD/JPY was decreasing.
If you wanted enter long, you only waited until ATR made decreasing.
In chart show a place that you could enter long while USD/JPY 's ATR was desreasing (Candle sticks had short bodies and long wicks). Of course, you had to confirm with some other indicators combine with other time frames to enter the market in time.
Determint the best position for their trading Stop orders
When the market is volatile, traders look for wider stops in order to avoid being stopped out of the trading by some random market noise.
When the volatility is low, there is no reason to set wide stops.
Traders have consistency stops in order to have better protections for their trading positions and accumulated profits.
Let's take an example: EUR/USD and EUR/JPY pair. It couldn't be the best choice if you put a risk 2-5% of the account for for both because EUR/USD moves on average 162 pips a day while EUR/JPY makes 198 pips daily. Puting Equal stop lost for both pairs just couldn't make sense.
How to set stops with Average True Range (ATR) indicator
Look at ATR values and set stops from 2 to 4 time ATR value. For example, if we enter Short trade and choose to use a 2-ATR stop, then we take a current ATR value, for example 100, and multiply it by 2. 100 x 2 = 200 pips (A current Stop of 2 ATR)
About a breakout/breakdown system
A Horizontal support/Resistance level crosses.
A trend line support/Resistance level crosses.
A Moving Average support/Resistance level crosses
For example, a trader has a breakout system that tells where to enter/exit. ATR indicator is widely used in many trading systems to gauge exactly that.
The traders follow next steps:
- measure ATR for the previous 14 days (default) or 21 days (another preferred value);
- for example, we’ve found that EURUSD 14 day ATR stands at 100 pips.
- we choose to enter at breakout/breakdown +/- 20% ATR (100 x 20% = 20 pips) - now, instead of rushing in on a breakout/breakdown and risking to be whipsawed, we enter at 1.3000 +/- 20 pips = 1.3020/1.3018 - we give up some initial pips on a breakout/breakdown, but we’ve taken an additional measure to avoid being whipsawed in a blink…
Let's take a breakout system that triggers an entry Buy order once market breaks above its previous day high. Let’s say this high was at 1.3000 for EURUSD. Without any filters we would Buy at 1.3002, but we could get be risking to be whipsawed.
For another example, if support level is at 1.2000, one can Sell at 20% ATR below the breakdown line.
ATR for trailing stops
Another common approach to using ATR indicator is ATR-based trailing stops or volatility stops. Here 20%, 30%, 50% or higher ATR value can be used. For example, Using the same range of 100 pips for EURUSD, if we choose to put 30% as ATR-trailing stop, it’ll be placed over the price at the distance of: 100 x 30% = 30 pips.