What is the ATR Forex Indicator on MT4?
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Trades can be made using a variety of indicators. Such indicators can also help create an overall decision based on the specific goal.
Traders widely use RSI, Stochastics, and other momentum-based indicators. However, different indicators can be based on volume, volatility, cycles, or another measure.
A trading indicator for measuring a currency pair’s volatility is presented in this lesson. This indicator is known as the Average True Range or ATR for short. First, let’s discuss the ATR forex indicator on MT4 and calculate it.
Average True range (ATR) Technical Indicators
Technical indicators are used in the financial markets to measure volatility, such as the average true range (ATR). It examines the price movements of a range of assets within a given timeframe, considering gaps in the price movement.
The shorter average of up to 10 periods can be used to measure more recent volatility, while the longer average of 20 periods can be used to measure longer-term volatility.
With spread betting or CFDs, you can trade a wide range of financial assets based on technical analysis.
High ATR values indicate high market volatility, and low ATR values indicate low market volatility. Despite the average true range, markets do not have and cannot be trended by the average true range, only by volatility and price gaps.
Technical indicators tend to be helpful when used with others. In this case, the average directional index (ADX), also created by Wilder, could be used alongside the average true range as a trend strength indicator.
A complete trading strategy needs to cover price action, trends, and market volatility.
ATR: What does it tell you?
Wilder first developed his ATR indicator for commodities, but stocks and indices can also benefit from using it. For example, stocks with high volatility have a higher ATR, whereas those with low volatility have a lower ATR.
The ATR is a valuable tool for traders when entering and exiting trades and can be incorporated into a trading system. Using simple calculations allows traders to measure the daily volatility of an asset with greater accuracy.
The indicator is not used to determine the price direction but rather to gauge the volatility created by gaps and to limit moves up and down. Using only historical price data, the ATR is a reasonably straightforward calculation.
No matter how the entry decision is made, the ATR is a standard exit method that can be used. Chuck LeBeau developed a technique called the “chandelier exit.” When you use the chandelier exit, you place a trailing stop under the most recent high reached by the stock if you entered the trade.
In technical analysis, the distance between the highest high and the stop level is equal to some multiple of the ATR. From the highest high since we entered the trade, we can subtract three times the ATR.
The formula for calculating average true range (ATR)
The first step is to identify the security’s trustworthy range to calculate ATR. An asset’s price range consists of its high and low price on any trading day. The true range is more comprehensive and includes the following:
TR=Max[(H − L),Abs(H − CP),Abs(L − CP)]ATR=(n1)(i=1)∑(n)TRi
TRi=A particular true range
n=the period employed
How can you calculate the average true range?
The average true range can be calculated by first calculating the acceptable range. For this, take the most significant calculation out of the three:
- Subtracting the current high from the previous close
- A low minus a close
- Low minus high
A moving average is calculated by averaging a series of actual ranges over a given period. To calculate the average true range, it is recommended to use a 14-period moving average, usually over a 10- to 14-day period.
Short time frames, such as hours, should be divided into two to ten periods; more extended time frames, such as weeks or months, should be divided into 20 to 50 periods.
Calculate ATR Technical Indicators and Signals in MT4
ATR Indicator: how to use it in trading?
As part of Wilder’s trend-following volatility system, he proposed an ATR trading strategy. For example, you can buy into a market that makes new highs every day following the trend.
Following the rules of this ATR trading strategy is relatively simple, and your position should effectively be stopped and reversed based on where you stop. Let’s take a look at how it works:
- Add a constant to the average true range. The resulting value was called the ARC by Wilder, and he recommended 3.0 as the constant
- Calculate the significant-close (SIC). In the preceding ‘N’ days, this was the most favourable close
- One ARC away from the SIC, square and reverse the position
- To give a sufficiently fast response to volatility, the ‘N’ was set at 7, designed to be used with daily values.
Using the ATR indicator, you can gain a general sense of the appetite for price moves in the market. For example, the range will only remain broad in a rising market as long as there is strong demand for further purchases. Conversely, some may interpret the narrowing of ranges as indicating a decline in direction seeking.
What are the benefits of the average true range (ATR)?
1. Calculates stop losses and exit points
The ATR can also determine where a winning trade should be closed by using a multiple of the signal.
Hence, if the ATR reading during your longer-term trade is 100 points, and the price has moved 1 x ATR (100 points) or 2 x ATR (200 points), in your favour, you might want to consider closing the position.
If you decide that 1 x ATR or 2 x ATR will help you contain your losses when the price moves against you and protect your profits when the price moves in your favour, you may want to use this as your trailing stop loss.
2. Breakouts in volatility
Another way to use the average true range indicator is to pay attention when a pair is trading in a sideways range and consider opening a position if the price breaks out with increased volatility.
As a result, it might be worthwhile to enter a position when ATR readings are consistently low for a lengthy period but rise suddenly from the low base, and other indicators confirm a breakout.
3. Opportunities to trade intraday
To expand further on the previous point, you may also find trading opportunities using this ATR data.
Based on the latest ATR reading, you might know that the GBP/USD pair will likely move 80 points once it breaks out of this narrow trading range if it has moved only 20 points overnight.
In the case of price movement that has already been contained within a 100-point range during the overnight session, it may not be worth trading any subsequent breakouts.
Therefore, this indicator can be used to find good trading opportunities and determine how far the price could move and where you should place your price target if you decide to open a position.
4. Any Forex pair’s volatility can be identified.
The average daily trading range of significant currency pairs and the current ATR for each pair are listed in my previous blog posts to help identify which pairs are worth trading at present.
The best pair to trade has an extensive daily trading range since these are likely to have larger price movements, which will help you generate more profits.
Forex pairs with the best ATR settings
You can experiment with different settings for the ATR indicator to find the one that works best for you if you plan on using it to trade the forex markets. For example, it may be more than sufficient to use a five or 10-period ATR if you are merely looking to measure volatility for the past 5 or 10 days (or periods).
I like to use the default setting of 14 since this indicates volatility at all timeframes. ATR’s greater than this shouldn’t be used. This is because previous volatility in the markets is mainly irrelevant.
Having a sense of how much the markets are moving right now (and how they’re likely to move) is all you need to gather meaningful information from this indicator.
Average true range (ATR) limitations
ATR is limited in two important ways. First and foremost, ATR is a subjective measure, meaning it can be interpreted differently. The ATR does not provide any definite indication of a trend’s reversal. The best method to determine the strength or weakness is to compare the ATR reading to an earlier reading.
ATR does not measure price direction but volatility only. Especially when markets experience pivots or reach turning points trends, this can lead to mixed signals.
Traders may perceive the ATR to confirm the old trend when the ATR increases suddenly after a significant move against the prevailing trend; however, this may not happen.
Mistakes newbie should avoid when applying ATR indicator
Mistake No 1: Use of ATR for gauging the direction
It has been mentioned that this indicator can predict whether price movement will continue in a specific direction. As a result, you should not forget that ATR is not an oscillator and doesn’t provide a reliable entry point to short or long positions the same way Stochastic or MACD does.
Mistake No 2: Using ATR for knowing about the areas of overbought and oversold
Visually, the ATR indicator line resembles the stochastic line. Nevertheless, it is free of overbought and oversold areas. Thus, you should not interpret the lines turning upward or downward relative to the lower boundary of the ATR as you would with classical oscillators. Instead, the trend is merely decreasing volatility.
Mistake No 3: Using ATR for an inevitable divergence
As we continue to discuss oscillators, do not be enticed by divergence and convergence on ATR charts, nor should you try to predict where you should enter long or short positions based on such signals. Therefore, it is not a signal for entering a market based on the Average True Range. Price fluctuations are measured using this auxiliary tool.
Mistake No 4: Comparison of ATR
Different trading instruments have different Average True Range values. As a result, this value should not be compared. It is both useless and inefficient.
Related questions: FAQ’s
1. What is the ATR indicator used for in forex?
It depends on how many ATRs you’ll use (e.g., 3, 4, 5, etc.! If you’re long, subtract X ATR from the highs, and that’s the trailing stop loss. The trailing stop loss is calculated by adding X ATR from the lows.
2. Is ATR a reliable indicator?
Additionally, long-term investors should monitor this indicator since they expect heightened volatility when ATR values remain relatively stable for extended periods.
3. ATR indicators: how do you read them?
A true range indicator can appear as just one line under your chart, moving up and down. A higher ATR indicates increased volatility, whereas a lower ATR indicates lower volatility.
4. What is the conversion between ATR and Pips?
Other traders employ different settings, but a standard method is to multiply 1.5X by the ATR indicator reading. A trader using the 1.5X multiple will somehow place a stop-loss at the 1.5x 240= 360 pips.
5. What is ATR’s stop loss method?
A common approach to identifying a stop-loss level using the ATR is to set your stop-loss at one ATR from your entry level. For example, to set a stop-loss at 1.1156, we would sell 20,000 EUR USD at 1.0958, and the ATR-14 is 198 pips.
ATR was created to be used with commodities, but it is now widely used in the stock and Forex markets.
An indicator such as the ATR does not measure the direction and only considers the range’s magnitude, limiting its value as a signal generation tool.
Nevertheless, it can provide a valuable indication of how much a market may move. Position size and stop placement are based on this information. However, the ATR is subjective. Therefore, it is rarely used as a single indicator to tell if a trend will reverse.
ATR is still a valuable tool for keeping up with changes in the market.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst