How to trade with ATR (Average True Range) — Unique Volatility Indicator. Videos, strategy examples and setup on IQ Option broker.
The Average True Range (ATR) is an indicator of technical analysis that works as a measure of volatility. It was introduced, along with many other technical analysis tools, by Welles Wilder in his book “New Concepts in Technical Trading Systems”. At the moment ATR is one of the most commonly used technical analysis indicators, has stood the test of time and has made its way onto many trading platforms.
The ATR indicator as displayed on the IQ Option trading platform
How does ATR work?
There are three most common uses for the indicator:
- indicating areas of consolidation,
- determining the level of acceptable loss,
- locating emerging market extremes.
Although it might seem otherwise, the idea behind the indicator is simple. Currency exchange rates always fluctuate. High volatility is one of the reasons why millions of traders around the world love the Forex market. The higher the volatility, the greater the number of potentially profitable operations. Trading opportunities come with volatility. Obviously, the direction of the future trend is important, but knowing that a trend is about to begin is already extremely useful. Moreover, if the volatility is high enough, in some strategies it is not even necessary to know the exact direction of the trend. There are several ways to estimate market volatility and ATR uses one of these.
To understand how ATR works you must first take a look at the concept of “true range”. According to Wilder, the “true range” is the largest of the following:
- Current Maximum less current Minimum,
- Current Minimum minus the previous Closing value.
- Current Maximum minus the previous Closing value,
For the last two points absolute values are used to guarantee positive numbers.
The “true range” is the largest of these three parameters
Average True Range is a moving average of the “true ranges” mentioned above. By default, a moving average of period 14 is used. The entire indicator is represented by a single line. When the volatility is rising, the ATR chart will go up. Otherwise, when the market is stable, the line will gravitate downwards.
How to set it up?
Setting the ATR indicator on the IQ Option platform is easy.
Click on the “Indicators” button in the lower left corner of the screen. Then choose ATR from the list of available indicators.
1. Set the indicator.
Then click on the “Apply” button. The indicator appears at the bottom of the screen, just below the price chart.
2. Set the indicator.
Average True Range is ready to be used.
How to use it in trading?
The indicator can be used by investors to determine optimal entry and exit points.
Usually periods of low volatility are mixed with periods of high volatility, when the market is unstable, thus creating numerous trading opportunities. The changing nature of the Forex market is what makes it so tempting. Knowing when the period of low volatility (and therefore of limited trading options) is about to end is a strategic advantage that traders can wait to use.
Periods of low volatility are interspersed with periods of high volatility
The longer the ATR period, the more precise the indicator will be, compromising part of the trading signals. And vice versa, reducing the number of periods you can get more signals, but it is likely that some of them will be false or at least not as precise as you want.
Strategies & Techniques: When to use it, When notto use it, and why use it: watch video
Tips on using ATR on IQ Option:
- The ATR indicator can be used to identify multi-year low volatility as it can lead to explosive breakout trades.
- Average True Range (ATR) is an indicator that measures market volatility.
- When the market breaks 2 ATR or more in one day, it tends to be “exhausted” and may reverse
- If you want to follow the trend, you can set your stop-loss X ATR away from maxima/low levels.
- You can set your stop loss 1 ATR from support and resistance to avoid being stopped out prematurely.
Important note: ATR uses absolute values instead of percentage variations. Indicators of different societies and even of the same society on different time intervals can not be adequately compared to each other.
Average True Range is not an indicator that can show the future direction of the trend or provide complete information on how the price graph will behave. However, the ATR is a unique indicator as it helps to track the volatility of price action. Combined with trend-following and momentum technical analysis tools, ATR can represent a reputable tool with good potential.
Read more on ATR on Investopedia: