Forex trading is a lucrative business that has attracted many people in recent years. However, it is not easy to make consistent profits in the Forex market. One of the critical factors that every trader should consider is the use of technical analysis indicators. One of these indicators is the Average True Range (ATR) indicator. In this article, we will discuss what the ATR indicator is and how to use it to close trades.
What is the ATR Indicator?
The ATR indicator is a technical analysis tool that was developed by J. Welles Wilder Jr. It is designed to measure the volatility of the Forex market by calculating the average range of price movements over a specific period. The ATR indicator helps traders to identify the potential price movements of a currency pair, which can be useful in determining the stop loss and take profit levels.
How to Calculate the ATR Indicator?
The ATR indicator can be calculated by taking the average of the true range over a specific period. The true range is the greatest of the following:
– The difference between the high and low of the current period.
– The difference between the high of the current period and the close of the previous period.
– The difference between the low of the current period and the close of the previous period.
The ATR indicator is usually calculated over a 14-day period. However, traders can adjust this period based on their trading style and strategy.
How to Use the ATR Indicator to Close Trades?
The ATR indicator can be used to close trades in two primary ways:
1. Using the ATR as a Stop Loss Level
The ATR indicator can be used to determine the stop loss level for a trade. The stop loss is a level where a trader exits a trade when the market moves against their position. The ATR indicator can help traders to determine the stop loss level by calculating the average price movement of the currency pair over a specific period.
For example, if a trader buys a currency pair at 1.1200 and the ATR indicator shows that the average price movement over the last 14 days is 50 pips, the trader can set the stop loss level at 1.1150 (1.1200 – 50 pips). This means that if the market moves against the trader’s position and reaches 1.1150, the trade will be automatically closed, limiting their potential losses.
2. Using the ATR as a Take Profit Level
The ATR indicator can also be used to determine the take profit level for a trade. The take profit level is a level where a trader exits a trade when the market moves in their favor. The ATR indicator can help traders to determine the take profit level by calculating the expected price movement of the currency pair over a specific period.
For example, if a trader buys a currency pair at 1.1200, and the ATR indicator shows that the average price movement over the last 14 days is 50 pips, the trader can set the take profit level at 1.1250 (1.1200 + 50 pips). This means that if the market moves in the trader’s favor and reaches 1.1250, the trade will be automatically closed, locking in their potential profits.
Conclusion
The ATR indicator is a powerful tool that can help traders to manage their risk and optimize their profits in the Forex market. By using the ATR as a stop loss and take profit level, traders can limit their potential losses and maximize their potential gains. However, traders should remember that the ATR indicator is not a guaranteed predictor of future price movements, and they should always have a solid trading plan in place before making any trades.
