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ATR Indicator CHEAT CODE UNLOCKED (Average True Range Trading Strategies For Beginners) - YouTube
Channel: The Secret Mindset
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The average true range is a great tool, when
it comes to adapting to the ever-changing
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market environment, being a useful indicator
in measuring volatility.
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The average true range measures the price
range of an asset â the higher the volatility
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the higher the ATR.
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The average true range is one of the most
useful indicators because it helps the trader
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deciding on where will set a stop loss or
profit target, or if he even should open a
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trade in the first place.
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The ATR is measured as the greatest of any
of the following 3 metrics:
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⢠the value of the current high minus the
low;
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⢠the distance of the current high minus
the previous close;
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⢠the distance of the current low minus
the previous close
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Despite the fact the Average True Range is
not so common among traders, this indicator
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can assist them in entering and exiting trades.
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The ATR indicator moves up and down as price
movements become larger or smaller.
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A new ATR reading is calculated as each time
period passes.
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On a one-minute chart, a new ATR reading is
calculated every minute.
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On a daily chart, a new ATR is calculated
every day.
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All these readings are plotted to form a continuous
line, so traders can see how volatility has
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changed over time.
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An assetâs range is the difference between
the highest price and lowest price on a given
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day.
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The Average True Range reveals information
about how volatile the asset actually is.
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High ranges reveal high volatility while small
ranges suggest low volatility.
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The average true range (ATR) is basically
an exponential moving average of the true
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range.
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Most common settings of this indicator are
the 14-day ATR.
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Depending on their trading objectives or the
time frames, traders can use shorter or longer
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inputs of the ATR.
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longer ATR will be slower and will generate
fewer trading signals
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shorter ATR will generate a higher number
of trading signals and will increase trading
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activity
For example:
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An average true range of only 5 periods would
not offer a large enough sample to generate
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an accurate indication of the true range of
the security
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An average true range of 50 periods would
generate a more smooth average true range
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on the chart, with fewer and possibly high-quality
signals.
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Letâs assume that you are using a swing
trading strategy and youâre using an ATR
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with a 50-period input.
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You should keep in mind that if youâre trading
on the daily chart, the ATR indicator will
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indicate the average volatility over the past
50 days.
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However, if youâre trading on the H4 chart,
the ATR indicator will display the average
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volatility over the past 50 H4 candles.
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So ATRâs value differs from time frame to
time frame, is not a unique value.
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How To Read Average True Range Indicator
First, ATR represents a range indicator for
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filtering out trades
If you prefer volatile markets or if your
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trading strategy is based on huge market moves,
then ATR can filter out markets that are low
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in volatility.
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Even if you prefer calm, quiet markets the
average true range indicator will help you
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to filter out those periods of times that
you would prefer to avoid.
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It is important to remember that the ATR does
not measure the market direction.
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By tracking the average true range, a trader
cannot identify the prevailing trend on the
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market.
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The ATR only tracks the magnitude of range,
so it has limited use for generating accurate
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trading signals.
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Itâs a useful indicator only for giving
an idea about how much the price may move
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in a defined time frame.
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Assume a stock moves $1 a day, on average.
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There is no significant news out, but price
has already moved letâs say 30% more than
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the average, and now you're getting a buy
signal from a strategy.
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The buy signal may be valid but, since the
price has already moved significantly more
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than average, betting that the price will
continue to go up and expand the range even
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further may not be a prudent decision.
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The trade goes against the odds.
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Since the price is already up substantially
and has moved more than the average, the price
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is more likely to fall and stay within the
price range already established.
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While buying once the price is near the top
of the daily range isn't prudent, shorting
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is probably a good option, assuming a valid
sell signal occurs.
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Now, very important: Entries and exits should
not be based on the ATR alone.
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The ATR is a tool that should be used in conjunction
with a strategy to help filtering trades.
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For example, in the previous situation, you
shouldn't sell simply because the price has
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moved up and the daily range is larger than
usual.
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You short only if a valid sell signal occurs,
based on your particular strategy.
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Second, the ATR formula will assist you in
setting profit targets
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Knowing the average range is extremely useful
since it allows the trader to estimate how
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much profit potential there is in the market.
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For example, there is no point looking for
200 pips of profit from a trade in a currency
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pair, if the average true range for that market
over the last 14 days is only 60 points.
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A simpler solution is to halve the 14-day
ATR of the instrument and use this figure
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as your profit target.
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Thus, after entering a trade in, you could
set yourself a profit target of around 30
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points.
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How To Trade With Average True Range
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ATR Indicator is useful to identify low levels
of volatility
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Average True Range doesnât tell the trader
anything about market direction.
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Donât get confused about its direction.
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If the Average True Range is going up on the
chart, that doesnât mean that the trend
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is up.
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A viable strategy would be to search for low
volatility levels, in order to find a trade
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in the direction of the main trend.
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The first thing we need to do is to identify
where the low volatility actually is.
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Keep in mind that the low volatility itself
is not enough for a new trend.
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This translates into the fact that the current
trend has run out of steam, it doesnât tell
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us that a new trend has begun.
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So, we must use the Average True Range in
conjunction with other oscillators or price
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action.
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For example, in this example we identified
low levels of volatility, but we cannot enter
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the market blindly.
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A smarter approach would be to wait for the
average true range to exit from that level
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and confirm the volatility increase with a
trend line breakout on the chart, or a rising
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Stochastic for example, or a divergence on
the RSI or CCI, depending on your strategy.
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Second strategy involves using ATR as a trailing
stop loss
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A trailing stop loss is a way to exit a trade
if the asset price moves against you but also
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enables you to move the exit point if the
price is moving in your favor.
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Many day traders use the ATR to figure out
where to put their trailing stop loss.
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Hereâs how it works: at the time of a trade,
look at the current ATR reading.
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A rule of thumb is to multiply the ATR by
two to determine a reasonable stop loss point.
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So if you're buying a stock, you might place
a stop loss at a level twice the ATR below
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the entry price.
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If you're shorting a stock, you would place
a stop loss at a level twice the ATR above
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the entry price.
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If you're long and the price moves favorably,
continue to move the stop loss to twice the
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ATR below the price.
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In this scenario, the stop loss only moves
up, not down.
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Once it is moved up, it stays there until
it can be moved up again or the trade is closed
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as a result of the price dropping to hit the
trailing stop loss level.
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The same process works for short trades, only
in that case, the stop loss only moves down.
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For example, say you take a long trade at
$10 and the ATR is $0.10.
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You would place a stop loss at $9.80 (the
10 cents ATR multiplied by 2).
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The price rises to $10.20, and the ATR remains
at $0.10.
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The trailing stop loss is now moved up to
$10.
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When the price moves up to $10.50, the stop
loss moves up to $10.30, locking in at least
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a 30 cent profit on the trade.
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This would continue until the price falls
to hit the stop-loss point.
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Now, hereâs an interesting indicator.
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In order to make it easier to visually see
where those stops would be, you could use
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the ATR bands.
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This indicator will show an upper and lower
band around the price, showing where you can
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put your stops (or trail them in open positions).
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You can use ATR bands in a number of ways:
⢠itâs an easy visual way to see where
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you can place your stop loss
⢠you can use a multiple of ATR as your
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target
⢠you can trail your stops alongside the
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ATR bands
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ATR bands indicator has only 2 variables:
the period and the multiplier.
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By default, ATR period is set to 24 with the
rationale that one day has 24 hours so that
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way, weâre getting the average price movement
for the past day.
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However, if youâre day trading, it could
be useful to have a shorter ATR period, for
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example if you want to make recent price volatility
more relevant.
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ATR multiplier also depends on your trading
style.
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Letâs say your current ATR value is 20 pips
and you use a multiplier of 2, then the bands
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will be 40 pips on each side.
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If you use a multiplier of 3, the bands will
be 60 pips on each side.
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There is no universal rule for setting stops
according to the ATR.
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It depends on each traderâs individual risk
tolerance while also allowing the trade âbreathing
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roomâ to develop.
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So backtest and choose the settings that are
in line with your strategy.
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As you probably know, one of the most important
aspects of trading and investing is having
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a disciplined risk management process.
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Because the ATR does not measure direction
and simply considers the magnitude of range,
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it has limited utility as a means for generating
trading signals.
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But it is a useful tool for providing an idea
about how much a market may move and will
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help you to apply a proper position size and
a proper stop placement.
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