June 29, 2011
3 Ways You Can Use The Average True Range (ATR) Indicator
I have talked about the Average True Range indicator before on this blog, but today I want to talk about three specific ways you can use this particular indicator. If you have never come across the ATR indicator before, it is essentially a measure of volatility, and broadly speaking it tells you the average trading range for any given period.
So let me give you the three main ways you can benefit from using the ATR indicator:
1. Volatility Breakouts
One of the best ways to make money from forex trading is to wait for a quiet period of consolidation, and then wait for a subsequent breakout. There are lots of ways you can do this, but one way is to wait for the ATR indicator to start rising sharply from a low base (indicating an increase in volatility), and then look at other indicators (or maybe just price action) for confirmation of a breakout.
2. Exit Points
The Average True Range indicator can be really useful in helping you determine where you should place your stop loss and profit target. Bill Poulos is a big advocate of the ATR indicator and it often forms part of his trading strategies. You can either exit a position after the price has moved 1 x the current ATR reading, exit once the price has moved 2 x ATR, or do what Bill often does and close half the position after 1 x ATR and the other half after 2 x ATR.
3. Finding Intraday Breakout Opportunities
I personally look at the ATR indicator (on the daily chart) every single morning to determine what the average trading range is for the GBP/USD pair. This helps me find possible breakout trades because if the overnight trading range between 12.00 and 8.00 (UK time) is small compared to the current ATR reading, this tells me that the price is likely to move quite a bit once a breakout occurs.
So these are three different ways you can use the Average True Range indicator, but I'm sure there are lots of other ways you could use this indicator as well. The point is that this is definitely one of the more useful indicators.