The average true range is an indicator that highlights market volatility. It does this via showing you how much a Forex pair or asset has moved on average over a set time period.

You can use the average true range (ATR) in multiple situations in your trading which include supporting you discover appropriate profit targets and where to set your stop loss to go well with the market conditions.

Using the average true range in a way you can identify the volatility and then read the charts to find high quality trade entries.

What is the Average True Range

The average true range was created by J. Welles Wilder to measure volatility.

As price makes larger or smaller moves higher or lower the ATR becomes bigger or smaller indicating the asset volatility.

The ATR is shown in pip amounts for Forex or dollar amounts for other markets. For example; a reading of 0.50 would mean 50 pips in the Forex market.

The standard setting for the ATR range is 14 and can be used on any time frame you choose.

As each new time frame closes the ATR is calculated. For example; on a daily chart the ATR is calculated at the shut of the subsequent daily time period.

These 14 time readings are then delivered collectively to show you a non-stop line that will provide you a rapid indication of normal asset volatility.

The common proper vary can’t be compared from one market to some other or one Forex pair to another. If an asset has a greater price, then it will have a large ATR in contrast to a market or stock with a smaller price.

How to Calculate the ATR

To calculate the ATR vary over a certain time period, the ‘true range’ is first calculated.

The true range is calculated through finding the greatest value of;

• Current high minus the current low.
• Current high minus the previous close.
• Current low minus the previous close.

After the true range is found over 14 periods, it is averaged to locate the ‘average true range’.

If you are using the standard 14 day time duration you can then use this data to calculate the ATR on a monthly, weekly, daily or intraday time frame.

How to use the ATR

Whilst the ATR is not an indicator you’re going to use to find new alternate signals, it is an indicator that you can use to discover better profit targets and stop loss areas.

The ATR will highlight the different market conditions and help you identify when they are changing allowing you to set large stops or look for larger profits.

Using the Average True Range for Profit Targets

A lot of traders are using a form of risk reward with their stop loss and profit targets. For example; risking 1 and looking for 2 reward.

The ATR can be used to assist you identify potential profit objectives and additionally work out if a trade entry is suitable.

If you discover a potential trade that has a very large ATR, then you know price is more likely to make a large move. If you get your trade call correct you can use this statistics to set a large target.

You can also use the ATR to spot trades that you should remain clear of because they have a small ATR and do not have a high chance of meeting your risk reward criteria.

Using the Average True Range for Stop Loss

The average true range is typically used for setting a stop loss and also trailing a stop loss.

One method for the use of the ATR to set your stop loss is using a a couple of the average true range. For example; you may set your stop 2 x the ATR away from the current price.

You ought to also use this method for trailing your stop. If price moved in your favor and you were looking to lock in profits you may want to use a multiple of the ATR to trail your stop higher or lower behind the current price.