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The average true range (ATR) measures volatility in pips and is calculated by averaging out ranges over a set number of periods. A rising ATR means increasing volatility and a falling ATR indicates low volatility, commonly seen in consolidating markets. Traders can use the ATR to determine exit points for trades using multiples of the ATR. Most broker platforms offer the ATR for use.
Understanding Average True Range (ATR) and its Significance in Trading
Introduction
As a trader, having a good understanding of technical indicators is essential. One commonly used indicator is the Average True Range (ATR), which primarily measures volatility in terms of pips or movements in price. The ATR is displayed as a line graph that oscillates up and down as the value of the ATR increases and decreases. In this article, we will dive deeper into the ATR and its significance in trading.
Defining Range
Before delving into ATR, it is essential to understand what is meant by the term “range.” Range, in trading, refers to the difference between the lowest traded price and the highest traded price in any given time period. This can be measured in pips.
How ATR Works
The ATR averages out the ranges over a preset number of proceeding periods; the typical setting is a 14-period lookback. This calculation is, in fact, quite simple. To explain, let’s say that during the first period, the range was 20 pips, the second period was 30 pips, the third period was 25 pips, and so on. The ATR line graph would show the average range over the 14 periods.
Interpreting the ATR
The ATR is displayed as a line graph that oscillates up and down based on the value of the ATR. A rising ATR means the volatility is increasing, while a falling ATR indicates a fall in volatility. For instance, when a market is consolidating, it is likely to have a falling or low ATR. On the other hand, a market that’s breaking out during a strong momentum move is likely to have a rising ATR.
Using ATR for Trading
As stated earlier, traders can use ATR as a measure of volatility in choosing where to exit their trades. Typically, traders use a multiple of the ATR as the preferred place to exit a profitable or loss-making trade. Suppose you enter a long buy order at a price of 1.2535, and the current ATR for that particular time period is 10. You could set your take profit target at three times the ATR value, which would be a 30 pip take profit target. Therefore, the take profit target would be 1.2565. Conversely, you may place a stop at 1.5 times the ATR, which would be a 15 pip stop loss, taking you out at 1.2520.
Where to Access ATR
The ATR is available for most broker platforms, making it easy to access. It’s well worth checking out and using it in your trading strategy.
Conclusion
In conclusion, ATR is a technical indicator used to measure volatility in terms of pips or movements in price. It averages out ranges over a preset number of proceeding periods and is an essential tool to gauge the market’s volatility. Traders can use ATR to decide where to exit their trades by setting their take profit target and stop loss orders based on a certain multiple of the current ATR value. In all, mastering the use of ATR is essential for any trader looking to enhance their trading strategy.
