How To Trade The Average True Range (ATR)
The Average True Range (ATR), developed by J. Welles Wilder is referred to as an technical analysis indicator that measures volatility in currency pairs and commodities. It is important to understand that ATR does not provide any forex signals, it only gives you an indication about volatility.
In general, ATR volatility in any currency pair is calculated on daily data for 14 successive periods by default. Volatility = daily high price – daily low price.
GBP/USD Average True Range (ATR 14) Daily Chart
Type of technical indicator: Volatility
Forex signals from ATR
There are no signals from the ATR indicator.
Three ideas on how to use Average True Range in forex trading
1) Setting stop losses based on ATR
You could place stop losses based on volatility. For example you enter a long/short trade and use a 30% ATR stop. The current ATR value is 149 pips in the chart above, thus stop loss would be 149 pips x 30% = 44.7 pips.
2) Setting trade objectives based on ATR
You could also place a profit target based on volatility. For example you enter a long/short trade and use a 50% ATR profit target. The current ATR value is 149 pips in the chart above, thus trade objective would be 149 pips x 50% = 75 pips.
3) Trailing stops based on ATR
For example one could use a 30% ATR trailing stop. In the chart above, the trailing stop would be trailed 44.7 pips behind the currency price.