The Average True Range (ATR) is a technical indicator that measures the volatility of a currency pair in the forex market. It is a commonly used tool by traders to determine the level of risk involved in a particular trade. The ATR is an essential tool that helps traders in identifying potential stop loss and take profit levels, thus making it a crucial component of any forex trading strategy.
In this article, we will discuss how to use ATR in forex trading and how it can help traders make informed decisions.
What is ATR?
The ATR indicator was developed by J. Welles Wilder, Jr. in the 1970s. It is a measure of volatility that takes into account the high, low, and closing price of a currency pair over a certain period. The ATR is calculated by taking the average of the true range over a specified period.
The true range is the greatest of the following:
1. The difference between the high and low of the period.
2. The absolute value of the difference between the high of the period and the previous close.
3. The absolute value of the difference between the low of the period and the previous close.
How to Use ATR in Forex Trading?
1. Identifying Volatility
The ATR is primarily used to measure volatility in the forex market. Traders can use the ATR to identify periods of high and low volatility. When the ATR is high, it indicates that the currency pair is experiencing high volatility, while a low ATR indicates low volatility.
2. Setting Stop Losses
The ATR can be used to set stop loss levels for trades. Traders can use the ATR to determine the maximum amount of price movement that they are willing to tolerate before closing the trade. A larger ATR value indicates that there is a higher chance of the price moving beyond the stop loss level.
3. Setting Take Profit Levels
The ATR can also be used to set take profit levels for trades. Traders can use the ATR to determine the potential price movement that can be expected for a particular currency pair. A larger ATR value indicates that there is a higher chance of the price moving beyond the take profit level.
4. Identifying Breakouts
Traders can use the ATR to identify potential breakouts. When the ATR is low, it indicates that the currency pair is experiencing low volatility and is likely to remain range-bound. However, when the ATR begins to increase, it indicates that the price is starting to move and may be breaking out of the range.
5. Confirming Trends
The ATR can also be used to confirm trends. When the ATR is increasing, it indicates that the trend is gaining momentum, while a decreasing ATR indicates that the trend is losing momentum.
Conclusion
The Average True Range (ATR) is a technical indicator that can be used by traders to measure volatility in the forex market. It is a crucial component of any forex trading strategy as it helps traders in identifying potential stop loss and take profit levels. The ATR can also be used to identify potential breakouts and confirm trends. By understanding how to use ATR in forex trading, traders can make informed decisions and improve their chances of success in the forex market.
