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Rookie traders often have an interesting story to share of how smooth their entry was into a particular market. The problem is that most of them don’t know how to get out at the right time. What tends to happen next is huge losses. Given how frequently this occurs in conversations, people create the number 1 rule of trading. That is to control your risk. Of course, this is easier said than done. You can recover from small losses quickly, but it feels like being punched in your gut when you are looking at massive losses. Thankfully, there are a few ways to help you manage your risks. One of the tools we will discuss today is the ATR indicator.

Contents

1. The Best ATR Indicator
2. What is ATR Indicator MT4?
3. The ATR Indicator Calculation
4. How to Use ATR Indicator?
5. The ATR Indicator Exit Strategy
6. How to Use the ATR Indicator for Stop Loss
7. The ATR Stop Loss Calculator
8. Conclusion

The Best ATR Indicator

First and foremost, you should use the ATR indicator built into Meta Trader 4, or MT4. This is an incredibly popular trading platform among forex traders. Unfortunately, the ATR indicator for MT5 has not been developed yet.

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What is ATR Indicator MT4?

The ATR indicator, or average true range indicator, measures market volatility. It was created by J. Welles Wilder Jr. a market technician, who wrote the book titled “New Concepts in Technical Trading Systems.” Originally, ATR is supposed to be used in the commodities market, but it has many applications in all types of securities such as forex trading.

As the name suggests, the ATR indicator looks at the average of true ranges over a period of time. The true range uses 3 elements: the current high minus the current low, the current high minus the previous close, and the current low minus the previous close. The three values must be absolute values, aka positive values. Whichever value is the highest is the true average for that time period.

ATR’s value corresponds to the market’s volatility, making it an excellent tool to measure a market’s volatility. You only need historical price data and simple calculations to do this. Higher volatility has higher ATR and lower volatility has lower ATR. It helps traders determine when to enter and exit trades.

As with all other tools, you need to use the ATR alongside other indicators to help you make trade decisions. The ATR alone does not provide enough vital information such as the price direction which can be analyzed through price action trading. You can use ATR to position sizing based on your risk tolerance, risk reward ratio as well as the market’s volatility.

That said, there are 2 main limitations for the ATR. For one, the ATR is subjective, meaning that the numbers it gives you are up to interpretation. Different traders see the values differently. An ATR value alone does not tell you whether a market trend is about to reverse or not. So, use the ATR with other indicators such as Bollinger Bands Forex, Trendline Trading, Support and Resistance Forex, while also studying the market’s history to see its strength or weakness.

In addition, the ATR only indicates the market’s volatility, not the direction of the price. This can produce mixed signals, especially when the market is at a turning point. So, you may think that the market is following an old trend based on the ATR readings when it is not.

Traders generally use the ATR to determine their exit point, regardless of their entry strategy. However, you can use the ATR to identify both entry and exit points. We will talk about these forex trading strategies later.

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The ATR Indicator Calculation

Normally, traders use periods of 14 days to calculate the ATR. The downside is that this method does not generate many trading signals. The shorter the period, the more trading signals you get.

For instance, suppose that you are a short-term trader who wants to look at the volatility of a market over a period of 4 days. So, you can just calculate the 4-day ATR. If you arrange the historical price data in reverse chronological order, you can see the maximum of the values of the 3 elements: the current high minus the current low, the current high minus the close of the last period, or the close of the last period minus the current low. Whichever value among the three is highest is the true range for that day. Rinse and repeat for the other days. With the values of the true range for all 4 days, you add them all together and divide by the number of days. In this case, you divide by 4. This is your average true range for those 4 days.

Here&#;s an example. Suppose that the true range of the 4 days are: , , , and So, TR₁ = , TR₂ = , TR₃ = 2, and TR₄ = Using the formula:

With n being the number of days. With the example above, we would have something like this:

Now, suppose that the ATR of the first 4 days is and the 5th day has a true range of You don’t have to repeat the above formula again to calculate the subsequent ATR value of the next day. Instead, you just take the previous value of the ATR () and multiply it by the number of days minus 1 (), add the true range for the current period (5^th day, ), and divide by the number of days (5).

The formula is:

With ATR_t being the ATR of the current period, ATR_(t-1) being the ATR of the previous period, TR_t being the true range of the current period, and n being the number of days. Using the example above, we have:

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How to Use ATR Indicator?

The number alone does not tell much. It starts to make a little more sense when you compare the ATR of the current period to the previous one. If the value is increasing, then that could mean that the market is increasing in volatility. Since ATR does not indicate the market’s direction, the increase in value could also indicate a long buy or a short sale.

Also, if the market experiences a sharp decline or a spike in prices, the ATR value increases, although this might not be the case for long.

If the ATR value is low, that means the prices remain in a small range for a while. In other words, you are looking at a market with low volatility. If the value remains low for a while, it could indicate a potential reversal or continuation move and an area of consolidation.

Although many traders use the ATR to determine their stop or exit point, you can also use it to identify entry points. For example, suppose that the market moves up 40% above the average, which indicates an entry point.

However, just because the prices are climbing does not mean that it will continue to do so. If the prices are already way higher than the average, then there is a good chance that the price will fall back to that average. In such a case, traders should short sell after identifying an exit point.

Another useful feature of the ATR indicator is that it can help traders spot breakouts before they happen. You don’t want to miss a breakout as it presents one of the best trading opportunities. When the price consolidates, the ATR will show you low values. This means that the market is experiencing low volatility. This is a sign of an imminent breakout that leads to high volatility again.

Here, the ATR helps traders time such breakouts efficiently and allows them to ride the trend as soon as possible. After a period of low or flat values, there will be a surge in ATR which indicates higher volatility in the market again. With this information, traders can plan how they can trade the subsequent breakout.

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The ATR Indicator Exit Strategy

There are a few exit strategies that require the use of ATR, some of which we will discuss here.

• Using a Signal Line for the ATR Indicator

The ATR only gives you information about the market’s volatility. It does not tell you when is the best time to enter the market. For this purpose, traders can overlay on the ATR that acts as a signal line. For example, you can add a period simple moving average over the ATR.

You are looking for the moment when the two lines meet. If the ATR crosses the simple moving average line and goes above it, this is the perfect time to buy in aggressively as both lines confirm an uptrend. If the ATR crosses the line and goes below it, that means a downtrend. Traders usually place sell orders when this happens.

To do this, you might need to use the TradingView chart. The interface is simple. First, you add the ATR indicator as normal. Then, mouse over the 3 dots, click, and you should see this.

From there, just select “Add Indicator”, select the moving average option, then you should have the moving average and the ATR indicator displaying on top of each other, giving you a clear view of when the line intersects.

• Trailing Stop Loss Strategy for the ATR Indicator

Traders use trading stop loss to help them maximize their profits if the market goes in their favor while protecting them from loss if it hits a certain threshold. That means, you can use it to exit a trade if odds are stacked against you, but also helps move your exit point if the market is in your favor. To do this, many traders use the ATR to figure out where to place their trailing stop loss.

This is a simple process. As you are looking at the chart, keep an eye on the ATR reading. A rule of thumb is to multiply the ATR value by 2. That will be your stop-loss point. If you are buying into the market, then the stop loss should be at least twice the ATR below the entry price. If you are exiting, the exit should be at least twice the ATR above the entry price.

If you’re long, you can move the exit as much as you want so long as things go your way. You can continue to move the stop loss twice the ATR below the price as it goes up. With this, the stop loss moves up with the price. The exit will remain there until the prices go up again or until the price comes down to hit the trailing stop loss level, which closes the trade.

Trailing stop loss also works for short trades, except the stop loss moves down. For instance, suppose you take a long trade at $20, with the ATR sitting at $ The stop loss would be $ (2 * $ below 20). When the price goes up to $ and the ATR is still at $, your trailing stop loss is now at $ When the prices go up to $21, the stop loss goes up to $ Here, you have already secured 50 cents of profit on the trade. You would continue to benefit from this so long as the price goes up. Once the price hits the stop-loss point, you are out with the profit you’ve accumulated so far.

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How to Use the ATR Indicator for Stop Loss

You may spot a flaw in the trailing stop loss strategy above. The problem is that there is a chance for the market to hit your stop loss, which then put you out of the trade, but then continues to move up. This really ruins your potential for a larger profit.

This is what happens when your stop loss is too narrow. In other words, you may have set your stop loss level too close to the prices. The solution then is to give it some more breathing room to accommodate the daily ups and downs of the market.

Then it is just a matter of setting a large enough buffer, but how large should it be?

It’s easy. First, look at the current ATR value, then select a multiple of that value (1x, 2x, 3x, 4x, etc.). Select the value closest to the support and resistance level.

The support level is an area below the prices where they do not go any lower. It is the price floor.

The resistance level is an area above the prices, so this is the price ceiling.

Another thing worth considering about the support and resistance level is that they are more like zones than lines, as illustrated above. They represent an invisible barrier that prevents prices from going lower or higher, respectively. However, that zone is not fixed. The more those zones are “tested”, meaning when the prices enter said zones, the weaker they become. That means, there is a potential for the price to go beyond those zones the more they are tested.

So, if you are long from the support level with the multiplier of 2, set your stop loss at 2 ATR below the lows of support. If your ATR value is 15, then 2 ATR is Alternatively, if you are short from resistance, with the multiplier of 1, set your stop loss 1 ATR above the highs of resistance.

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The ATR Stop Loss Calculator

Calculating stop loss for the ATR is a simple process. You just look at the current value of the ATR and multiply it by whatever number you want. Again, the rule of thumb is 2. This is where things can get tricky for new traders. Take the current value of the ATR and consider it to be a unit. So, if the current ATR is 20, then 1ATR = If you want to place a stop loss 2ATR below the support level, that means 40 pips. A pip is the smallest currency unit, or the last decimal. So, if the price at the support level is , then your stop loss is at A pip in this case equals to , so 40 pips are

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Conclusion

There you have it. This is all you need to know about the basics of ATR indicator. As with all other tools in forex, your strategy determines how you can use them to maximize your profit.

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What Is the Average True Range (ATR)?

The average true range (ATR) is a technical analysis indicator introduced by market technician J. Welles Wilder Jr. in his book New Concepts in Technical Trading Systems that measures market volatility by decomposing the entire range of an asset price for that period.

The true range indicator is taken as the greatest of the following: current high less the current low; the absolute value of the current high less the previous close; and the absolute value of the current low less the previous close. The ATR is then a moving average, generally using 14 days, of the true ranges.

Traders can use shorter periods than 14 days to generate more trading signals, while longer periods have a higher probability to generate fewer trading signals.

The Average True Range (ATR) Formula

The formula to calculate ATR for an investment with a previous ATR calculation is :

​nPrevious ATR(n−1)+TR​where:n=Number of periodsTR=True range​

If there is not a previous ATR calculated, you must use:

​(n1​)i∑n​TRi​where:TRi​=Particular true range, such as first day’s TR,then second, then thirdn=Number of periods​

You must first use the following formula to calculate the true range:

​ TR = Max [(H−L),∣H−Cp​∣,∣L−Cp​∣]where:H=Today’s highL=Today’s lowCp​=Yesterday’s closing priceMax=Highest value of the three termsso that:(H−L)=Today’s high minus the low∣H−Cp​∣=Absolute value of today’s high minusyesterday’s closing price∣L−Cp​∣=Absolute value of today’s low minusyesterday’s closing price​

How to Calculate the ATR

The first step in calculating ATR is to find a series of true range values for a security. The price range of an asset for a given trading day is its high minus its low. To find an asset's true range value, you first determine the three terms from the formula.

Suppose that XYZ's stock had a trading high today of $ and a low of $ It closed yesterday at $ Using the three terms, we use the highest result:

(H−L)=$−$=$

∣(H−Cp​)∣=∣$−$∣=$

∣(L−Cp​)∣=∣$−$∣=$

The number you'd use would be $ because it is the highest value.

Because you don't have a previous ATR, you need to use the ATR formula:

(n1​)i∑n​TRi​​

Using 14 days as the number of periods, you'd calculate the TR for each of the 14 days. Assume the following prices from the table.

You'd use these prices to calculate the TR for each day.

You find that the highest values for each day are from the (H - L) column, so you'd add up all of the results from the (H - L) column and multiply the result by 1/n, per the formula.

$​+$+$+$+$+$+$+$+$+$+$+$+$+$=$​

n1​($)=​($)​

×$=$​

So, the average volatility for this asset is $

Now that you have the ATR for the previous period, you can use it to determine the ATR for the current period using the following:

nPrevious ATR(n−1)+TR​​

This formula is much simpler because you only need to calculate the TR for one day. Assuming on Day 15, the asset has a high of $, a low of $, and closed the previous day at $; its TR works out to $

14$(14−1)+$​​

14$(13)+$​​

14$+$​​

14$​=$​

The stock closed the day again with an average volatility (ATR) of $

What Does the ATR Tell You?

Wilder originally developed the ATR for commodities, although the indicator can also be used for stocks and indices. Simply put, a stock experiencing a high level of volatility has a higher ATR, and a lower ATR indicates lower volatility for the period evaluated.

The ATR may be used by market technicians to enter and exit trades and is a useful tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction; instead, it is used primarily to measure volatility caused by gaps and limit up or down moves. The ATR is relatively simple to calculate, and only needs historical price data.

The ATR is commonly used as an exit method that can be applied no matter how the entry decision is made. One popular technique is known as the "chandelier exit" and was developed by Chuck LeBeau. The chandelier exit places a trailing stop under the highest high the stock has reached since you entered the trade. The distance between the highest high and the stop level is defined as some multiple multiplied by the ATR.

The ATR can also give a trader an indication of what size trade to use in the derivatives markets. It is possible to use the ATR approach to position sizing that accounts for an individual trader's willingness to accept risk and the volatility of the underlying market.

Example of How to Use the ATR

As a hypothetical example, assume the first value of a five-day ATR is calculated at , and the sixth day has a true range of The sequential ATR value could be estimated by multiplying the previous value of the ATR by the number of days less one and then adding the true range for the current period to the product.

Next, divide the sum by the selected timeframe. For example, the second value of the ATR is estimated to be , or ( * (5 - 1) + ()) / 5. The formula could then be repeated over the entire period.

While the ATR doesn't tell us in which direction the breakout will occur, it can be added to the closing price, and the trader can buy whenever the next day's price trades above that value. This idea is shown below. Trading signals occur relatively infrequently but usually indicate significant breakout points. The logic behind these signals is that whenever a price closes more than an ATR above the most recent close, a change in volatility has occurred.

Limitations of the ATR

There are two main limitations to using the ATR indicator. The first is that ATR is a subjective measure, meaning that it is open to interpretation. No single ATR value will tell you with any certainty that a trend is about to reverse or not. Instead, ATR readings should always be compared against earlier readings to get a feel of a trend's strength or weakness.

Second, ATR only measures volatility and not the direction of an asset's price. This can sometimes result in mixed signals, particularly when markets are experiencing pivots or when trends are at turning points. For instance, a sudden increase in the ATR following a large move counter to the prevailing trend may lead some traders to think the ATR is confirming the old trend; however, this may not be the case.

The Bottom Line

The average true range is an indicator of the price volatility of an asset. It is best used to determine how much an investment's price has been moving in the period being evaluated rather than an indication of a trend. Calculating an investment's ATR is relatively straightforward, only requiring you to use price data for the period you're investigating.

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The key to success in trading is about maximizing your profits and minimizing risk.

The Average True Range Trading strategy will help you to achieve just that. The Average True Range indicator, or the ATR indicator, will help you to reach this goal. Our team at Trading Strategy Guides will show you how to use the ATR indicator to accomplish 2 things:

1. How to use the ATR indicator to measure stop loss placement.
2. How to use the ATR indicator to measure profit targets.

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Table of Contents

ATR Trading Strategy: Introduction

The ATR trading strategy can be successfully applied to any intraday, swing, or day trading time frames and bigger time frames. It can also work on different asset classes. The main idea behind the Average True Range Trading strategy is we only want to trade when the market is ready to accelerate.

If we identify how much the price moves on average, this can be helpful to achieve consistency in trading. This can be accomplished by using the ATR Indicator.

Now…

Before we move forward, we must define the ATR indicator. You’ll need this for the Average True Range Trading strategy and how to use it.

ATR Indicator Explained

Simply put, the ATR indicator measures the volatility of price changes in any security or market. In this regard, the ATR is a universal indicator. The ATR Indicator can be used to trade anything including stock, forex, commodities, and cryptocurrencies.

The ATR indicator measures the volatility in pips. This is a great way to read the market volatility. Simply knowing the volatility of the last day or the last hour, doesn’t provide us with enough data to be able to make an informed decision. This is why the ATR indicator determines and plots the average of a specific number of sessions.

By default, the ATR indicator is set to So, if you’re on the daily chart, the ATR indicator will show you the average volatility from high to low over the past 14 days. By contrast, if you’re on the 1h chart, the ATR indicator will display the average volatility over the past 14 hours.

The ATR indicator will display the volatility value in the top right-hand corner of the ATR indicator window.

The best average true range period to trade with is Our team at Trading Strategy Guides has found out through extensive research that 10 sessions or 10 periods is the perfect number to measure the volatility.

How to Use the ATR Indicator

The ATR indicator is an important indicator. When used in the right way, it can grow your profits and decrease your losses. The biggest misconception about the ATR indicator is that traders mistakenly believe a higher ATR value means a bullish trend and lower ATR value means a bearish trend. This is wrong and far from the truth.

The ATR indicator doesn’t say anything about the trend direction.

However, to some degree, with the help of the best ATR Forex strategy, we can determine the market trend. This can be done by looking at the general ATR value relative to the trend direction.

In the figure below, we demonstrate how the ATR volatility changes notably during different stages of the trend.

What we can notice is that during up-trends the ATR indicator tends to post lower volatility. During downtrends, the ATR indicator tends to post higher volatility. The reason behind this ATR volatility phenomenon is given by the fear factor.

What do we mean by this?

Well, as the old trading saying goes, “Market take the stairs up and the elevator down.” It’s the way the market has been functioning for centuries.

Moving forward, we’re going to introduce you to an unconventional way of doing technical analysis. We’re going to apply the day moving average over the ATR indicator. Many platforms will allow you to accomplish this. However, if you are not able to perform this action on your platform, we highly recommend you use the free web-based platform TradingView.

How to Overlay Indicators Over Another Indicator

Using the TradingView platform, after you have attached the ATR indicator, simply move with the mouse cursor over the ATR indicator window. Right-click and select, “Apply Indicator on ATR.” Another window will pop up from where you can select a Moving Average using a 20 period.

Let’s be quite frank here, you’ll not find this kind of stuff anywhere else. Our team at Trading Strategy Guides has been using an unorthodox approach to trading. This is one of the reasons why we have been extremely successful.

Now, it’s time to show you a real demonstration of how the ATR indicator works. You can get more comfortable incorporating this amazing indicator into your trading strategy.

Average True Range Trading Strategy

(Rules for Buy Trade)

Step #1: Make Sure Your Chart Setup Configuration Looks the Same as our Price Chart

The Average True Range Trading strategy has a chart configuration with two windows:

1. The first window should contain your favorite currency pair.
2. The second window should contain the ATR indicator with the EMA attached to it (use the above instructions in order to overlay the EMA).

Now that we have our chart properly configured, it’s time to move to the next step of the best average true range Forex strategy.

Step #2: Wait for ATR Indicator to Break Above EMA

A breakout in the ATR indicator reading above the EMA is indicative of higher volatility to come. With higher volatility, this also means trading opportunities and bigger profits to be made. A break of the ATR line above the EMA can be great proof of a new trend.

The Average True Range Trading strategy incorporates not just the ATR volatility readings, but it also looks at the price action to confirm the increase in the ATR volatility. This brings us to the next step of the best average true range Forex strategy.

Step #3: Check the Price Chart to Ensure the ATR Breakout is Followed by a Price Breakout

After the ATR line broke above the EMA we want this to be followed by a break in price as well. If we’re looking to buy, we want to see a big bullish candle relative to the previous candles popping up on the chart. If the price breaks up and is accompanied by a break higher in volatility, there is a high probability of the market moving in the same direction.

Now, all we need to establish is how to enter the trade. If we already have an idea of where the market is most likely to move. This brings us to the next step.

Step #4: Enter Long Once We Break Above the High of the Breakout Candle

Depending on your preferred time frame, you’ll have to wait until the breakout candle has been developed. Then enter long once the next candle breaks above the high of the breakout candle.

This is key to the success of the Average True Range Trading strategy. You need a big bold candle to confirm the ATR breakout. You’ll learn soon that the ATR indicator will break many times above the EMA. But it won’t be confirmed by the price action in which case you don’t want to execute any trades.

The ATR indicator is a great tool to use when it comes to establishing profit targets. This brings us to the next step of our Average True Range Trading strategy.

Step #5: Your Take Profit Target Should Be Equal to the ATR Indicator Value

The ATR indicator can be of great help to determine your take profit target. This is self-explanatory because if you know how much, on average, the market is prone to move, we want to conform to this reality and have that as a target.

In our case, we can see the ATR volatility reading has a value of 16 pips.

This means our profit target should be calculated 16 pips above the high of the breakout candle. The breakout candle high is at and adding 16 pips to that price we end up with a profit target at

It’s not over until you know where to place your protective stop loss. This brings us to the last step of the best average true range Forex strategy.

Step #6: Place the Stop Loss below the Breakout Candle Low

In trading, you have to learn to always protect your back and hide your protective stop loss at the most logical point. A break below the breakout candle low will invalidate our trade idea. This is the place where we want to hide our protective stop loss.

Note** The above was an example of a buy trade. Use the same rules – but with the only difference that you need a bearish breakout candle – for a sell trade. In the figure below, you can see an actual SELL trade example using the best average true range forex strategy.

ATR Trading Strategy Video

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Conclusion: ATR Trading Strategy

The ATR Trading strategy provides you with an unorthodox approach to trading. It combines both market volatility and price action to provide us with the best trades possible. We hope that by now you’re sold out to the power of the ATR indicator’s ability to forecast the market with a high degree of accuracy.

Thank you for reading!

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