The Average True Range (ATR) indicator has often been one of my favorite indicators when I was going through Forex training. It is a quality indicator for determining a short term profit target where you can take some profits with half of your position and then leave the rest of the position on to see if you can get more profits. It is a measure of volatility and was created by Welles Wilder who has probably created more technical trading indicators than anyone else. The Average True Range (ATR) is often times a factor in the equation of other indicators that have since been created.
Average True Range (ATR) Indicator
As a volatility indicator, its value rises when the volatility of an instrument increases.
When trading stocks or most futures that do not include Forex, one will often find that the Average True Range (ATR) value will increase dramatically at the bottom of a major sell-off. This is not the case so much in Forex because sell-offs in currencies do not necessarily act the same way that they do in stocks, options or other futures instruments.
But, you will find Forex acting similarly to the other instruments during times of consolidation. It is during these times that the Average True Range (ATR) value will decrease and some traders even use the Average True Range (ATR) in the same way that they would a Bollinger Band.
The Debate Remains, Do You Need To Know The Calculation In Order To Know How To Trade Forex?
The calculation for the Average True Range (ATR) is really quite simple, though not necessary for your Forex training. Though there is seldom a need to do the calculation because your trading platform will do all of the calculations for you, it is sometimes still nice to know what it is.
The Average True Range (ATR) is equal to one of the following values:
- The distance from today’s high to today’s low
- The distance from yesterday’s close to today’s high
- The distance from yesterday’s close to today’s low
Whichever of those is the largest number will constitute the current Average True Range (ATR) and gives you a basic idea of the average trading range of that particular instrument over the previous 14 days (14 is the default setting though it can be changed as you see fit.)
How to Use Average True Range (ATR) Indicator in Your Forex Trading Strategy?
As briefly mentioned above, you can use it for a form of profit targeting.
Because it is based on the volatility of the current market, you can increase your initial profit target to capture a larger move if the market is volatile or it will help you decrease your profit target if the market is not as volatile. It is significantly accurate for such a tool.
That being said, I would never recommend it take the place of understanding pure support and resistance which will always make you a better Forex trader if you learn to use pure support and resistance. The more that you get to know how to trade Forex , then the more you will understand that indicators are always secondary to price action, and often times not even necessary.
The best way to understand all of this information and actually how to assimilate it into a quality Forex trading plan is to invest time in getting Forex training. I enjoy talking about trading and I also enjoy taking an active role in developing the skills in people to become consistently profitable and successful Forex traders so don’t be shy about getting in contact with me.
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