威客电竞竞猜

I love the Average True Range (ATR) indicator.

威客电竞竞猜 unlike other trading indicators that measure momentum, trend direction, overbought levels, and etc.

The ATR indicator is none of it.

Instead, it鈥檚 something entirely different.

And if used correctly, the Average True Range is one of the most powerful indicators you鈥檒l come across.

That鈥檚 why I鈥檝e written this post to explain the awesomeness of the Average True Range indicator.

Here鈥檚 what you鈥檒l learn:

• What is the Average True Range (ATR) indicator and how does it work
• How to 鈥渉unt鈥� for EXPLOSIVE moves in the market before it occurs using the ATR indicator
• How to use the ATR indicator and set a proper stop loss so you don鈥檛 get stopped out prematurely
• How to use the ATR indicator and ride BIG trends
• Using ATR to set profit target
• How to identify 鈥渆xhaustion鈥� moves and market reversals with the ATR indicator

Or if you prefer鈥�

You can watch this training video below:

Or else, let’s get started…

ATR indicator explained 鈥� what is it and how does it work

The Average True Range is an indicator that measures volatility.

It鈥檚 developed by J. Welles Wilder and was first mentioned in his book, New Concepts in Technical Analysis Systems (in 1978).

Now you might be wondering:

鈥淗ow is the ATR values calculated?鈥�

Well, it鈥檚 done using 1 of 3 methods, depending on how the candles are formed.

Here鈥檚 how鈥�

Method 1: Current high less the current low

Method 2: Current high less the previous close

Method 3: Current low less the previous close

Confused?

No worries, just look at the image below鈥�

As you can see:

Example A: The current candle鈥檚 range is larger than the previous candle, we use method 1.

Example B: The current candle closes higher than the previous candle, we use method 2.

Example C: The current candle closes lower than the previous candle, we use method 3.

The takeaway is this鈥�

The larger the range of the candles, the greater the ATR value (and vice versa).

The ATR indicator is NOT a trending indicator

Now鈥�

A mistake traders make is to assume that volatility and trend go in the same direction.

Nope!

Recall:

The Average True Range indicator measures the volatility of the market.

This means volatility can be low while the market is trending higher (and vice versa).

Here鈥檚 an example: The S&P is trending higher while volatility is heading lower鈥�

Does it make sense?

Good.

Then let鈥檚 move on鈥�

How to use ATR indicator to 鈥渉unt鈥� for EXPLOSIVE breakout trades (before it occurs)

Here鈥檚 a fact:

The volatility of the markets is always changing.

It moves from a period of low volatility to high volatility (and vice versa).

This means that when the market is in a low volatility period鈥� you can expect volatility to pick up, soon.

So, how do you use this knowledge to find explosive breakout trades before it occurs?

Here鈥檚 how鈥�

1. Wait for volatility to reach multi-year lows (on the weekly timeframe)
2. Identify the range during this time period
3. Trade the break of the range

Here are a few examples:

Brent Crude Oil multi-year low volatility followed by a break of Support鈥�

Eurusd multi-year low volatility followed by a break of Support鈥�

Do you notice how these explosive moves occur after a period of low volatility?

Are you sick of getting stopped out of your trades prematurely? Here鈥檚 how to fix it鈥�

Let me ask you鈥�

Have you ever put on a trade only to watch the market hit your stop loss, and then continue moving in your expected direction?

It sucks, right?

And that鈥檚 because your stop loss is 鈥渢oo tight鈥�.

So, what鈥檚 the solution?

Give your trade room to breathe.

This means your stop loss should be wide enough to accommodate the daily swings of the market.

Now you鈥檙e probably wondering:

鈥淏ut how much is wide enough?鈥�

Well, you can use the ATR indicator to help you with it鈥�

1. Find out what鈥檚 the current ATR value
2. Select a multiple of the ATR value
3. Add that amount to nearest Support & Resistance level

So鈥�

If you are long from Support and have a multiple of 1, then set your stop loss 1ATR below the lows of Support.

Or if you鈥檙e short from Resistance, and have a multiple of 2 then set your stop loss 2ATR above the highs of Resistance.

An example:

Need more explanation?

Then go watch this training video below where I鈥檒l explain how to use the ATR indicator to set a proper stop loss 鈥� so you don鈥檛 get stopped out 鈥渢oo early鈥�.

How to use the ATR indicator and ride BIG trends

Here鈥檚 the thing:

If you want to ride massive trends in the markets, you must use a trailing stop loss on your trades.

The question is鈥� how?

There are many ways to do it, but one of the popular methods is to use the ATR indicator to trail your stop loss.

Here鈥檚 how鈥�

1. Decide on the ATR multiple you鈥檒l use (whether it鈥檚 3, 4, 5 and etc.)
2. If you鈥檙e long, then minus X ATR from the highs and that鈥檚 your trailing stop loss
3. If you鈥檙e short, then add X ATR from the lows and that鈥檚 your trailing stop loss

And to make your life easier, there鈥檚 a useful indicator called 鈥淐handelier stops鈥� which performs this function.

Here鈥檚 an example of the 5ATR as a trailing stop loss:

Now you鈥檙e probably wondering:

鈥淪o Rayner, which is the best ATR multiple to use?鈥�

Well, the truth is鈥� there鈥檚 no best ATR multiple.

If you use a smaller ATR multiple, then you鈥檒l ride a small trend (and the time held on the trade is shorter).

If you use a bigger ATR multiple, then you鈥檒l ride a bigger trend (and the time held on the trade is longer).

So which approach suits you best?

Only you can answer that question yourself.

Moving on鈥�

Using ATR to set profit target, here鈥檚 how it works鈥�

Now if you don鈥檛 want to ride trends, you can also use the ATR indicator to set a target profit.

Here鈥檚 how it works鈥�

You know the ATR indicator tells you how much a market can potentially move for the day.

So鈥�

If EUR/USD has a daily ATR of 100 pips, it moves an average of 100 pips a day.

This means if you鈥檙e a day trader, you can have a target profit of about 100 pips (give and take) and there鈥檚 a good chance it鈥檒l be hit.

Of course, you don鈥檛 want to 鈥渂lindly鈥� set a 100 pips target profit.

Instead, combine it with market structure (like Support & Resistance, swing high & low, etc.) so you know where the price might reach for the day.

Here鈥檚 an example:

Let鈥檚 say EUR/USD moves an average of 100 pips a day, again.

You went long at support and you鈥檙e not sure where to take profits.

There are 3 possible Resistance levels: 30 pips away, 80 pips away, and 200 pips away.

Which do you choose?

The 30 pips target is likely to be hit within a day but you鈥檙e leaving money on the table as the market could move 100 pips a day.

The 200 pips target is unlikely to be hit within a day (as it鈥檚 more than the ATR value).

The 80 pips target is your best option as it鈥檚 within the daily ATR value (and offers more than 30 pips).

Here鈥檚 what I mean鈥�

Three possible targets on EUR/USD 1-hour:

So here鈥檚 the takeaway鈥�

1. Identify the daily ATR value
2. When you set your profit target, combine it with market structure and ensure the distance is less than the daily ATR value

Pro Tip:

If you trade longer-term, you can refer the weekly or monthly ATR value.

Next…

How to find 鈥渆xhaustion鈥� moves and time market reversals

I鈥檓 sure you agree nobody can work 鈥渇orever鈥� without exhaustion.

After an hour or so, most of us will need a break to recharge.

But wait.

Why am I telling you this?

威客电竞竞猜 the market is just like you, it can only 鈥渨ork鈥� for so long before taking a break.

This means there鈥檚 a good probability the market will 鈥渆xhaust鈥� itself after hitting its limits.

Now you might be wondering鈥�

鈥淗ow do you tell what鈥檚 the limit?鈥�

Well, you can find out using the Average True Range indicator.

Here鈥檚 how鈥�

1. Identify the current ATR value
2. Multiply it by 2
3. If the market moves 2 times the ATR value, then it could be 鈥渆xhausted鈥�

Now, I don鈥檛 suggest you trade this concept in isolation.

Instead, combine it with Support & Resistance and you鈥檒l find yourself identifying market reversals ahead of anyone else.

Here鈥檚 an example: GBPJPY has a weekly ATR value of 300 pips鈥�

And now, you realized GBPJPY has moved 500 pips (close to 2ATR) and it came into an area of Support.

Then, it forms a large Bullish Engulfing pattern on the Daily timeframe.

Now鈥� what do you think will happen?

Well, I can鈥檛 say for sure.

But you have an 鈥渆xhaustion鈥� move, the price coming into an area of Support, and a Bullish candlestick pattern that signals the market could reverse higher.

Conclusion

Here鈥檚 what you鈥檝e learned:

• The Average True Range (ATR) is an indicator that measures the volatility of the market
• You can use the ATR indicator to identify multi-year low volatility because it can lead to explosive breakout trades
• You can set your stop loss 1 ATR away from Support & Resistance so you don鈥檛 get stopped out prematurely
• If you want to ride a trend, you can trail your stop loss X ATR away from the highs/lows
• When the market hits 2 ATR or more within a day, it tends to be 鈥渆xhausted鈥� and could reverse

Now here鈥檚 my question for you鈥�

How do you use the Average True Range indicator?

Leave a comment below and let me know your thoughts.