ATR Strategy and Settings

Market volatility is often why traders can make money from price fluctuations. Market volatility is a constant factor in price swings that drive or lower prices. Volatility is part of trading and can make it more risky. However, it can be beneficial if it’s caught in the right moment. How can you measure volatility and determine the best time to enter or exit the markets? The Average True Range indicator (ATR), is a useful tool.

What is the ATR indicator used for?

The market volatility is measured by the Average True Range indicator. The following values are used to calculate it:

  • The difference between the current high/low;
  • The difference between the closing price at the moment and the previous high (absolute value);
  • The difference between the closing prices (absolute value) and the current low.

The indicator was originally designed to be used in conjunction with commodities. It can be used with any type of instrument that you trade. ATR can be used for different periods making it a universal tool. The default period for which the indicator is used is 14. However, traders can adjust it to suit the length of trades they want to execute.

ATR doesn’t show the trend direction. It measures market volatility and can be used as an auxiliary tool to determine when trade entry/exit should occur.

Reading ATR Indicator Signals

Let’s take a look at the indicator that is applied to the USD/JPY chart in the IQ Option traderoom.ATR applied to the Forex USD/JPY chart on IQ Option

The ATR line, which fluctuates between values to the right and left, is shown in blue. These values can be used to indicate market state and volatility intensity.

ATR generally stays at low levels when the market is calm or a sideways tendency is formed. A long-term sideways trend can lead to a strong trend (downwards or upwards). The indicator then starts to grow and indicates that volatility has been increasing. If the indicator reaches high levels, it could indicate that the trend has halted and will soon reverse.

How to trade according to ATR Signals

  • ATR can begin growing at low values so a trader can open a trade in line with the emerging trend direction.
  • ATR can reach high values , and a trader may leave the deal to lock in profits.
  • It is important to combineATR and trend-following indicator for more precise signals.

To gauge the strength of the trend, the Average True Range should be compared with the previous values. ATR is not 100% accurate and it is impossible to exit or enter deals based solely on its signals.

Exemple

The following example shows how EUR/USD enters into a downtrend. ATR starts with low volatility and slowly rises to higher volatility.Example of ATR used on the Forex EUR/USD pair

The indicator falls to its lowest value again at the end of the trend. This is indicative of a sideways trend. This signal can be combined with other indicators to allow traders to use it to enter deals at the start of a downtrend and ride it until it reverses.

ATR Strategy: Double ATR Method

Double ATR strategy is an example of an indicator combination that includes ATR. To find entry points to the market, it uses ATR Trailing Stops, the Average True Range and a Simplemoving Average.

You can watch the entire video to learn more about Double ATR.

ATR Indicator Settings

ATR setup is easy as a trader only needs to choose the period for the indicator. These steps will help you set up ATR using the IQ Options platform.

  • Click on the link to find the Average True Range from the List of Indicators and click it.
  • You can choose the color and the period of your indicator. You can change the period to suit your needs. The shorter trading period, the shorter period of calculation , and vice versa.
  • To set the indicator up on the chart, click Apply You can now use the indicator!


ATR settings for the IQ Option platform

To reset the indicator to its default settings, click on the ” by default” button.

Conclusion

The market volatility indicator, the Average True Range, is a useful tool. Although it doesn’t give precise indications about entries or exits, the Average True Range indicator can be used to determine when the trade should be opened or closed based on increasing or decreasing volatility. ATR indicator is most effective when used in conjunction with trend-following tools such as the Moving Average for better results.

Are you using ATR in your trading strategy. We’d love to hear about your experiences in the comments section.

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