Forex Indicators_3. Forex ATR Average True Range

Lesson 3: Forex ATR Average True Range

The ATR - or Average True Range - is a volatility indicator. It measures the range of
the sessions and pips, then determines the average of that range over a certain
number of sessions. For example, if using a daily chart with a default setting of 14,
the ATR will measure the average daily range from high to low from the past 14
days.
The current ATR in a daily chart shows a reading of 0.0153. It means the average
range for the pair is 153 pips a day.

So how can this be used in your trading? One: Looking for extended periods of low
volatility. As you can see in the chart, the ATR values have been low for a while. As
the price is stuck in the consolidation pattern, we can expect the break out of this
consolidation to be very explosive.

Two: Trailing Stops. When you have found well- established and strong trends, you
want to stay in them as long as possible. So instead of using set price targets, you
can trail your stops instead.

ATR is great for that. For example, the daily ATR shows a reading of 140 pips, so
you can set your stop 140 pips below the current market price. Then, every day,
when the price moves in the direction of the trend, you adjust your prices
accordingly.
More conservative traders will use a wider stop; for example, two times the ATR
reading. More aggressive traders will use tighter stops, typically, half of the ATR
reading.
Three: Using ATR for price targets. ATR is especially great for day traders. The daily
ATR reading for the pair is 72 pips. The opening price on that particular day is 1.30.

So if you are planning to close your trades at the end of the day, note that it’s unlikely
that the rate will go much higher than 1.3072...or much lower than 1.2928.
Remember, ATR shows only the volatility of the market;It doesn’t show the direction
of the trend.