ATR indicator (Average True Range)

Content:

  1. indicator ATR (Average True Range);
  2. formula indicator;
  3. description and application of the ATR indicator;
  4. ATR indicator for setting Stop Loss;
  5. how to download/install ATR indicator for MT4 and MT5;
  6. conclusion.

Indicator ATR (Average True Range)

Indicator ATR (Average True Range) shows market volatility, considering price gaps when opening a market session.

J. Wells Wilder Jr. invented the ATR indicator, as well as RSI, ADX, Parabolic SAR and described them in the book “New Concepts in Technical Trading Systems”.

Formula indicator

The indicator calculates the average value of TR (true range) for the specified period. TR is calculated using closed candles, determining the distance from the maximum to the minimum of the candle using the following formula:

TR[i]= Max(High[i],Close[i-1])- Min(Low[i],Close[i-1]);

TR (true range) is calculated as the difference between the current high or yesterday’s closing price and between the current low and yesterday’s closing price. The resulting value is measured in absolute value as is the price.

For example, ATR (30) = $ 1.6 – this means that the average value of the last 30 candles is $ 1.6.
TR calculation example:

Example of calculating TR (true range)

We select the maximum value from 55.36 and 53.75 and subtract the minimum value from two 54.44 and 53.75. We get TR = 55.36-53.75 = 1.61.

Description and application of the ATR indicator

The indicator does not give trading signals or market direction either in the past or in the future. The indicator shows increased or decreased interest of participants in the market. If ATR values rise, then there is high volatility in the market, speaking about the increased activity of its participants. If ATR values fall on the market, low volatility characterizes the absence of a clear interest of traders in the price movements of the instrument.

As a rule, the indicator is used to set Stop Loss, and, accordingly, Take Profit. In any strategy, it is important to observe the ratio of take profit to stop loss. In order to set a stop loss, an ATR with a parameter of about 30 is used to smooth out session fluctuations for daily traders and get the average monthly value for daily candles.

Extensive research advisors on history and trading experience show that stop loss should be 2-3 ATR. This is a price movement, upon reaching which, indicates a change in trend and the loss of the feasibility of holding a position in this direction.

The indicator also shows the change in volatility without taking into account the direction of price movement, however, volatility gives information about the current state of the trend. As a rule, strong trends begin after long sideways (flat), in which the volatility and, accordingly, the ATR indicator is at low values. When a powerful movement begins, the ATR value begins to grow sharply, showing the emergence of a new trend.

ATR indicator for setting Stop Loss

The ATR indicator has only one input parameter, which by default is 14, but the trader can change it at his discretion. I advise you to change it to a value of 30. When setting stop losses, there are usually only 2 methods. The first way to put behind the last peak, and the second to use the ATP indicator. The last peak is something subjective and abstract, therefore it is not very convenient to use it in advisers, scripts, and in the strict rules of the trading system.

setting stop loss using the ATP indicator

Let’s consider an example of setting stop loss with the help of this indicator in a bitcoin transaction on a daily timeframe. The indicator shows the current value of 356. I will use the maximum for the last 100 candles, equal to 496, round up to 500. The current price is 7180. Therefore, in a sell deal, our stop loss will be 7180 + 2 * 500 = 8180.

How to download/install ATR indicator for MT4 and MT5

Each trading terminal has an ATR indicator, so it does not need to be downloaded.
To insert it on the chart, click – Insert – Indicators – Oscillators – Average True Range.

How to download install ATR indicator for MT4 and MT5

 

Conclusion

Without the use of the ATR indicator, it is difficult to create a clear trading system, much less write an adviser with competent risk management. The ATR indicator is indispensable for the transition from abstract models (patterns) to the absolute values of the instrument. The indicator of the average true range is a universal tool that should be in the arsenal of each trader.

LEAVE A REPLY

Please enter your comment!
Please enter your name here