Forex trading is a popular investment option that allows traders to make profits by exchanging different currencies. However, trading forex can be a daunting task for beginners who are not familiar with the different technical indicators and strategies used in forex trading. One of the most popular technical indicators used in forex trading is the Average True Range (ATR). ATR is a volatility indicator that is used to measure the fluctuations in price over a given period. In this article, we will discuss how to trade forex with ATR.
What is ATR?
The Average True Range (ATR) is a technical indicator that measures the volatility of a currency pair over a specified period. It was developed by J. Welles Wilder Jr. and was introduced in his book “New Concepts in Technical Trading Systems” in 1978. ATR is calculated by taking the average of the true range of a currency pair over a specified 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.
ATR is usually calculated over a period of 14 days, but it can be adjusted to suit the trader’s preference.
How to use ATR in forex trading?
ATR can be used in forex trading in several ways:
1. Identifying trends
ATR can help traders identify the strength of a trend. When the ATR value is high, it indicates that the currency pair is highly volatile, and there is a strong trend in place. On the other hand, a low ATR value indicates that the currency pair is less volatile, and there is no strong trend.
2. Setting stop-loss orders
ATR can be used to set stop-loss orders. Traders can set stop-loss orders based on a multiple of the ATR value. For example, if the ATR value is 50 pips, a trader can set a stop-loss order at 2 times the ATR value, which would be 100 pips.
3. Setting profit targets
ATR can also be used to set profit targets. Traders can set profit targets based on a multiple of the ATR value. For example, if the ATR value is 50 pips, a trader can set a profit target at 2 times the ATR value, which would be 100 pips.
4. Identifying breakouts
ATR can be used to identify breakout points. When the ATR value is high, it indicates that the currency pair is highly volatile, and there is a high chance of a breakout. Traders can use ATR to identify breakout points and enter trades accordingly.
Example of trading forex with ATR
Let’s take an example to understand how ATR can be used in forex trading. Suppose a trader wants to trade the EUR/USD currency pair. The trader decides to use the ATR indicator with a period of 14 days. The ATR value for the EUR/USD currency pair is 50 pips.
The trader decides to set a stop-loss order at 2 times the ATR value, which would be 100 pips. The trader also decides to set a profit target at 2 times the ATR value, which would be 100 pips.
The trader enters a long trade when the EUR/USD currency pair breaks above the previous resistance level, which is at 1.2000. The trader sets a stop-loss order at 1.1900 (100 pips below the entry price) and a profit target at 1.2200 (100 pips above the entry price).
The trader monitors the trade, and when the price reaches the profit target, the trader closes the trade and makes a profit of 100 pips.
Conclusion
ATR is a powerful technical indicator that can be used in forex trading to identify trends, set stop-loss orders, set profit targets, and identify breakout points. However, it is important to note that ATR is just one of the many technical indicators used in forex trading, and traders should use it in conjunction with other indicators and strategies to make informed trading decisions.
