As a forex trader, it is essential to understand the concept of average true range (ATR) and how to read the ATR pip number. ATR is a technical analysis tool that helps traders to measure the volatility of a currency pair. It is an indicator that shows the average pip movement of a currency pair over a specified period.
The ATR pip number is the number of pips that a currency pair moves on average over a specific period. It is an essential tool for traders who want to set stop-loss orders, take-profit orders, and determine their risk-reward ratio. The ATR pip number is expressed in pips, which is the smallest unit of measurement in forex trading.
To calculate the ATR pip number, you need to use a formula that takes into account the high, low, and close prices of a currency pair over a specific period. The formula is as follows:
ATR = [(Prior ATR * 13) + Current TR] / 14
TR is the true range, which is the greatest of the following:
– High minus Low
– Absolute value of High minus the previous Close
– Absolute value of Low minus the previous Close
The ATR is calculated over a specified period, such as 14 days or 20 days. The higher the number of days, the more reliable the ATR pip number will be.
Now that you understand how the ATR pip number is calculated let’s look at how to read it. The ATR pip number is a measure of volatility, which means that a higher ATR pip number indicates that a currency pair is more volatile. Conversely, a lower ATR pip number indicates that a currency pair is less volatile.
For example, if the ATR pip number for EUR/USD is 50, it means that on average, the currency pair moves 50 pips per day. This information can be used to set stop-loss orders and take-profit orders. If a trader wants to set a stop-loss order at 50 pips, they can use the ATR pip number to calculate the appropriate level.
Moreover, the ATR pip number can help traders to determine their risk-reward ratio. If a trader wants to enter a trade with a risk-reward ratio of 1:2, they can use the ATR pip number to calculate the potential profit and loss. For example, if the ATR pip number for a currency pair is 50, the trader can set a stop-loss order at 50 pips and a take-profit order at 100 pips.
In conclusion, the ATR pip number is an essential tool for forex traders. It helps traders to measure the volatility of a currency pair and make informed trading decisions. The ATR pip number is calculated using a formula that takes into account the high, low, and close prices of a currency pair over a specific period. The ATR pip number is expressed in pips, which is the smallest unit of measurement in forex trading. By understanding how to read the ATR pip number, traders can set stop-loss orders, take-profit orders, and determine their risk-reward ratio.
