Looking at an average true range strategy

For any sort of investment, there are two important factors any trader should be concentrating on. Try to maximize your profits by buying low and selling high. The second is to minimize your risks. This is a somewhat common-sense way of looking at things. An average true range strategy can help you do just that. This strategy makes use of the Average True Range (ATR) indicator.

The ATR indicator

The ATR indicator is a great help in identifying market or security volatility. Therefore, you can use it for almost any trade you are considering investing in. It does not matter if it is in commodities, Forex. Whatever you please.

The indicator itself is typically a derivation of a 14-day moving average of many true range indicators. Therefore, it shows the average risk over a 14-day period. You can also set it for an indication over 14 hours or weeks.

In the top right-hand corner, it tends to have an indicator for volatility value. This is the figure we are focusing on today.

Some traders make some rather common misconceptions with regards to the ATR, unfortunately. They tend to believe that a higher ATR is indicative of a rising trend, and a lower of a descending trend. However, it has nothing to do with the direction a market is moving. The confusion is understandable, though. You can use the ATR to find the best average exact range strategy. What one should do is look at the ATR value relative to the current direction of a trend.

So, we have determined here how the ATR generally works. From this basic evaluation, we can then move onto the strategy you need to employ to take advantage of this indicator. This is what we shall focus on next time around, in the next article.