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HOW TO TRADE WITH AVERAGE TRUE RANGE TECHNICAL INDICATOR

yourFXguide-Hello Traders !!! In the early time of my trading carrier when I used to get introduced with any new technical indicator, I used to feel like a new window of trading was opened to me. Now a days, I do not be that much excited when I get introduced with a new technical indicator because I know a single technical indicator cannot make me a successful trader.

Whatsoever, I cannot stop studding new indicators when I found them because I am to gather as much trading knowledge as I can. Everyday, I try to develop a new trading system to find the most profitable one. And to develop best trading systems, I need to have the knowledge of effective technical indicators.

Do you have any effective technical indicator in your trading system? If yes, you can share it with me dropping a comment into the comment section below.Okay !!! Today, I am going to write about the ATR-Average True Range, a technical indicator developed by J. Welles Wilder in his 1978 book,New Concepts in Technical Trading Systems.

ATR-Average True Range technical indicator is a volatility indicator, that explains how volatile an asset has been. In other way, It shows how much the price of an asset has been moving over a period of time. Commonly, 14 period ATR is applied by the traders, but any period can be selected by the traders depending on the trading strategies.

If an ATR-Average True Range  indicator of 14 period is applied on a hourly chart and it gives a reading -0.00257, it means the average movement of the asset in last 14 hours is 25.7 pips. So, the ATR on hourly chart explains what is the average movement of the asset in last certain hours in terms of pips.

Anyways, now it is the time to focus on "How is the ATR  interpreted to trade?". In different ways ATR can be interpreted to trade financial instruments. Let's start with interpreting the peaks of ATR. A peak of ATR can appear before a market top or bottom. 

In the above illustration, we can see ATR indicator made a peak when market reached a bottom. And in the illustration below, ATR made a peak when the market reached a top.

From the above two illustrations, we can see ATR can be an effective tool to identify the trend reversals. When an ATR made a peak, it can be an indication of a correction or reversal. 

When ATR value is low, it indicates that the market is to be in a range before the ATR starts to go higher again. When the ATR value is increasing, it indicates a strong trend either bullish or bearish. And when the ATR value is decreasing, it indicates that the trend is going to be weaker.

If the ATR indicator is applied on the day chart, it can be interpreted as the pivot point analysis. For example if the ATR value is 85 pips in the last 14 days, and the market is in bullish trend, it can be predicted that the market may move 85 pips in the next day. 

Some traders  also apply ATR to find stop loss and take profit target. I will write about applying ATR on day chart and applying ATR to find stop loss and profit target later in details.

Another effective application of ATR can be to identify the effective breakouts. There are hundreds of trading strategies that depend on breakouts. In some of my previous post, I explained how MACD histograms can be applied to identify the reliability of the breakouts. Any breakouts trading strategy can include ATR to identify the effective breakouts.

An increasing ATR can be a signal of reliable breakout. If the ATR start to go higher when the breakout takes place, it indicates that the breakout is reliable. Here in the above illustration, we can see a flag pattern breakout takes place and ATR starts to go higher. The breakouts can be of Moving Average, chart patterns, trend lines or support and resistance levels. 

Dear Traders, these are the some of the techniques to apply the ATR indicator to trade financial markets. If you have any question regarding this post, you can drop it into the comment section below. I generally response to your comments within 24 hours.

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1 comment :

  1. I really appreciate this wonderful post that you have provided for us. I assure this would be beneficial for most of the people. forex indicator

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