Looking at an average true range indicator strategy, pt.2

Today, we are continuing to look at the average true range indicator strategy. This is a strategy that has the Average True Range (ATR) indicator as to its central tool. Last time, we discussed what the ATR is and how it tends to behave. This time around, we will go deeper into how the strategy works.

Using the ATR

Generally speaking, when you start using an ATR for this strategy, you want a 20-day range. Therefore, what you need to do is select a moving average over 20 periods for the indicator. Once you do this, you can start with the analysis.

Here, we are assuming you are doing a forex trade. You need to have a window displaying your currency pair. You need the ATR in another window, with a 20-exponential moving average. When the ATR indicates a reading above the 20-EMA, high volatility is likely. This could mean either high profits or high losses. It depends on the situation. If you are careful though, and you know where the market is moving, you can make considerable gains. Hopefully, you will also see a price breakout, a sudden movement. If there is an even higher amount of volatility after this, the price will likely keep moving in this direction.

The accompaniment of a breakout candle is what you want to see as well. It should be much larger than those surrounding it. Once this candle fully develops, you will know it will be the time to enter the trade.

You can also determine what your profits should be. What you need to do is first find the pip value in your ATR volatility rating. Your target should then be that many pips above the high point of the breakout candle.

And there you have it! That is a quick guide on using ATRs for trading. We hope it has been helpful.