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ATR (AVERAGE TRUE RANGE)

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Before looking at how I use the ATR, it may be of some use to define what the ATR is. The Average True Range indicator is a simple tool but is very useful in measuring volatility. – PowerPoint PPT presentation

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Title: ATR (AVERAGE TRUE RANGE)


1
ATR(AVERAGE TRUE RANGE) HOW I USE IT TO PLACE
FUNDAMENTAL TRADES
  • Reference
  • https//www.platinumtradingacademy.com/

2
Index
  • ATR(average True Range) How I Use It To Place
    Fundamental Trades
  • ATR Measured
  • 1. How I Use The ATR When Placing A Fundamental
    Trade
  • 2. Using The ATR To Trade Volatility
  • 3. Using The ATR For Profit Targets
  • 4. Using The ATR As A Filter

3
(No Transcript)
4
ATR(average True Range) How I Use It To Place
Fundamental Trades
  • Before looking at how I use the ATR, it may be of
    some use to define what the ATR is.
  • The Average True Range indicator is a simple tool
    but is very useful in measuring volatility.

5
  • In very simple terms, the ATR measures the price
    range of a currency pair (it could also be a
    stock or any security) so that the higher the
    volatility of the currency pair the higher the
    ATR.

6
ATR Measured
  • The ATR is measured as the greatest of any of
    the following 3 metrics
  • The current high minus the low.
  • The value of the current high minus the previous
    close.
  • The value of the current low minus the previous
    close.

7
  • Whichever is the highest of these three metrics
    is then represented as the average true range of
    the currency pair.
  • Typically, the number is then smoothed using a
    14-day moving average.
  • Finding the average range of a currency pair has
    a number of important implications that can help
    make better trading decisions.

8
  • The best example is for POSITION (FUNDAMENTAL)
    trading.
  • These are trades intended to be of a very
    long-term nature.
  • There are a number of uses for the ATR as well as
    for my FUNDAMENTAL trade set-ups and I will add
    these as well.

9
  • I have listed four ways below of how to use the
    ATR as a support indicator when placing a trade,
    or use it effectively when you are already in a
    trade.

10
1. How I Use The Atr When Placing A Fundamental
Trade
  • As my approach for FUNDAMENTAL trades is from of
    a longer-term perspective, I look at the Monthly
    ATR for the currency pairs that I am interested
    in trading.
  • The background to my trades from my existing
    fundamental view is that equities are going to
    roll over and sell off and at the same time
    commodity currencies are going to weaken such as
    AUD, NZD and CAD.

11
  • Keeping things very simple, which is what I try
    to do.
  • I am going to use my existing live trades as
    examples.
  • Firstly, I look for Fibonacci levels for entries
    in conjunction with pivot points.

12
  • Once I have those levels analyzed, I look at my
    currency pair establish how much I am prepared to
    risk in the trade and what type of lot I will use
    and determine what quantity I will buy or sell
    based upon my proposed entry and stop loss
    levels.
  • As I have written, many, many times in my blogs
    certain currency pairs are very volatile and
    smaller trade sizes should be used to cope with
    and absorb the wild moves associated with such
    pairs.
  • The ATR gives you a fantastic lead in connection
    with this.

13
  • Additionally, you can hedge any trades to give
    you another layer of protection given their
    longer-term nature.
  • The potential for huge swings before your trade
    takes shape in the chosen direction is always
    there and hedging limits both your risk and
    exposure.
  • (Hedging will appear as a future discussion topic
    in the TRADER TOPICS section) 

14
  • GBP/NZD Entry Level 2.1090
  • Monthly ATR 850
  • ATR Stop 1.9340
  • My Stop placed on the trade 1.9500
  • As you can see I have room to move the stop if I
    want to meet the ATR indicator levels, should I
    decide that I want to.
  • You must realize with such huge stop loss levels
    in place, an appropriate trade size should be set
    accordingly.

15
  • As an example, and, all my trades above are
    around these lot sizes - GBP/NZD
  • Potential loss 850 pips.
  • Trade size at outset 2 x micro lots (850 x 0.20)
    170.00 risk.
  • If I did not alter the lot size or the limit and
    the trade hits my limit/target of 2.1200. Trade
    size 2 x micro lots (1,010 x 0.20) 202.00
    reward.

16
  • Obviously, when the trade is profitable I would
    add lot sizes and move / adjust my limit
    accordingly.
  • I would add lots and take profits along the way
    to my profit target.
  • As a minimum I would be looking for a 21 ratio. 

17
  • They key is closing your hedge trade in the
    opposite direction at the correct time to
    maximize profitability.
  • It is not that straightforward at times.
  •  
  • There are other uses for the ATR that are more
    traditional.

18
2. Using the ATR to trade volatility
  • The ATR can be used as a trading signal in its
    own right.
  • Lets say that you are watching a market for a
    number of days and you have noticed that
    volatility has dropped significantly from its
    historical average.

19
  • Since low periods of volatility often precede
    explosive moves in either direction, you could
    wait for the ATR to increase and place a trade in
    the direction of the move.
  •  
  • Crossovers can also be used. For example, placing
    a trade when the fast ATR (e.g. 14 period)
    crosses over a slower ATR (e.g. 100 period).
  • This can be an effective breakout volatility
    strategy.

20
3. Using The ATR For Profit targets
  • For day traders, knowing the average range of a
    currency pair is extremely useful since it allows
    you to estimate how much profit potential there
    is in the market.
  • For example, there is no point looking for 150
    pips of profit from a trade in the GBP/USD, if
    the average range for that market over the last
    14 days is only 80 pips.

21
  • You will simply end up waiting for profits that
    do not come and will likely end up losing money.
  • A better solution is to halve the 14-day ATR and
    use this as your profit target.
  • In other words, after entering a trade in the
    GBP/USD as above you can give yourself a profit
    target of around 40 pips.
  • This is a much safer way to trade.

22
4. Using The ATR As A Filter
  • The average true range is also a good indicator
    to use for filtering out trades.
  • Traders typically need volatility to make any
    money so if you have a system that generates lots
    of different signals you can filter out those
    currency pairs that are low in volatility by
    discarding those with a low ATR.

23
  • Concentrating on currency pairs with the highest
    ATRs mean you can trade the markets that are
    experiencing the most movement and therefore the
    most profit potential.

24
Thank You
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