The average true range (ATR) indicator can be used to create a comprehensive trading system or to provide entry and exit signals as part of a strategy. This volatility indicator has been used by professionals to improve their trading success for decades. Discover how to use it and why you should try it.
How do you trade futures using ATR?
ATR breakout systems can be employed in any time frame strategy. They’re particularly effective as day trading techniques. Day traders add and subtract the ATR from the closing price of the first 15-minute bar using a 15-minute time frame. This serves as an entrance point for the day, with stops in place to avoid losing money if prices return to the closing of the first bar of the day. Any time frame can be utilized, such as five minutes or ten minutes.
How should you use the ATR indicator?
You must utilize a trailing stop loss on your trades if you wish to ride large market moves.
There are a variety of approaches, but one of the most popular is to trail your stop loss with the ATR indicator.
- If you’re long, subtract X ATR from the highs to get your trailing stop loss figure.
- If you’re short, multiply the lows by X ATR to get your trailing stop loss.
And, to make things easy for you, there’s a handy indicator called “Chandelier stops” that does just that.
You can ride a modest trend if you select a smaller ATR multiple (and the time held on the trade is shorter).
If you choose a larger ATR multiple, you’ll be able to ride a larger trend (and the time held on the trade is longer).
What are your thoughts about ATR bands?
- J. Welles Wilder’s formula is used to calculate the Average True Range.
- The bands are calculated by multiplying the daily closing price by a factor of the Average True Range.
- The ATR multiple is added to the daily Low and subtracted from the daily High in the HighLow option.
- The lower band only moves up in an uptrend, while the upper band only moves down in a downtrend, thanks to a ratchet mechanism.
- Plots are calculated one day ahead of time (for example, the stop calculated from today’s closing price is plotted for tomorrow).
In trading, what is 1 ATR?
The average of true ranges during a given time period is known as the average true range (ATR). ATR is a volatility indicator that takes into consideration any price gaps. The ATR is typically calculated using 14 periods that might be intraday, daily, weekly, or monthly. Use a shorter average, such as 2 to 10 periods, to gauge current volatility. Use 20 to 50 sessions for longer-term volatility.
How does this metric work?
- The range of each bar grows larger as the ATR expands, indicating increased market volatility. A price reversal accompanied by a rise in ATR would signal that the move is strong. Because the ATR isn’t directional, a growing ATR can signal either selling or buying pressure. High ATR readings are usually the result of a fast rise or fall, and they are unlikely to be sustained for long periods of time.
- A low ATR value suggests a sequence of small-ranged periods (quiet days). The lower volatility is due to the low ATR values obtained during extended sideways price action. A lengthy period of low ATR values could suggest a consolidation zone with the potential for a continuation or reversal.
- The ATR can be used to detect variations in volatility and can be used as a stop or entry trigger. The ATR stop will adjust to sharp price moves or consolidation zones, which can provoke an abnormal price movement in either direction, whereas fixed dollar-point or percentage stops would not. To catch these unexpected price fluctuations, use a multiple of ATR, such as 1.5 x ATR.
In crypto, how do you use ATR?
The duration of calculation for the ATR indicator should be 14 periods because this is the quantity used by default by most trading platforms. As a result, a large number of retail and institutional traders are likely to use this level as their primary benchmark.
Because many market players’ eyes are on such levels, it’s crucial to remember the 14-period ATR of significant time periods like the 4h, daily, weekly, and monthly.
Why Use ATR as Stop Loss?
The ATR is commonly employed as a trailing stop loss method since it allows for the use of volatility as a measure to protect current market holdings. It also aids in holding transactions for extended periods of time and making the most of trending markets.
Only move trailing stops in the direction of the current location, never against it. The purpose of a trailing stop loss is to reduce risk and lock in winnings without giving up too much of your profit.
The next 15-minute Bitcoin chart is a wonderful example of how to trail-stop losses with the ATR.
You should project the trailing stop level once the price triggered the short entry at the breach of the bearish flag and the market moves in our favor. It is calculated using the current closing price and the current ATR multiplied by one:
- For a short position, the trailing stop loss level is equal to (current closing price + 1ATR*).
- For a long position, the trailing stop loss level is equal to (current closing price 1ATR*).
*Note that the number of times the ATR can be added or subtracted is determined by the trading strategy. The most prevalent components are usually 1-3 ATR.
The trailing stop loss level in this example is drawn by an indicator that projects the level for us automatically (red line). The trader’s job is then to adjust the stop-loss order based on that reference.
Notice how the short trade was made possible by this trailing stop system? It gives you adequate breathing room to let your trade run and profit from the downturn before the reversal.
Using ATR to Set Profit Target
The key benefit of using the ATR to set targets is that it provides information about appropriate price objectives based on underlying volatility.
The ATR indicator provides a good estimate of the day’s potential range. However, we need more than the ATR indicator to fine-tune our exits. Price goals should be set utilizing the ATR indicator in conjunction with market structure such as support and resistance levels, historical swing high/low points, moving average, and more.
The next BTCUSD daily chart shows how to pick targets using the weekly ATR (14) (red line).
Consider how, following the price’s double bottom, the major two targets were resistance levels A and B. However, area A had a better chance of being achieved because it is where the Weekly ATR is located; see how the price dropped as soon as it touched that area.
When we’re trading in a strong market, we might use multiple ATR as a profit target. Overshooting the ATR target is a common occurrence in runaway markets.
If the current daily Bitcoin ATR is $200, for example, your profit target could be 2 or 3 times the ATR value. That would be a profit target of $400 or $600.
- Higher ATR time periods should be used. You can utilize the daily, weekly, or monthly chart, depending on your trading strategy.
- Choose a profit target where a number of parameters, market structure, and ATR all come together.
Using Average True Range to Spot False Breakout
A false breakout occurs when price briefly breaks above (below) a significant consolidation pattern, support or resistance level, previous swing high, or swing low, but then reverses direction.
Most of the time, it’s only after the fact that you can discern if a breakout is legitimate or not. However, this is of no help to traders. What’s the purpose of clinging to the handrails if you’ve already missed your boat? The average true range, which is a leading indication, is a simple solution to get around this problem.
Looking for a divergence signal between the ATR indicator and the price action is the first rule of trading false breakouts. In other words, if the ATR indicator and the price action disagree, it’s possible that we’re dealing with a false breakout.
A fake breakout, for example, occurs when a breakout below a support level is not followed by a rising ATR.
Finally, check for these indicators to recognize a false breakout using the ATR indicator:
- Price has already exceeded the range’s upper limit or has surpassed its daily average real range.
Sample Case: ATR in Crypto Trading
A practical example is sometimes the most effective method to grasp an idea. We’ll use the 15-minute Bitcoin chart to demonstrate how a trade could be completed and managed in this instance.
The entry is based on a method of moving averages (any technical analysis could be used). When the fast-moving average (10 SMA) crossed the slow-moving average (20 SMA) to the upside, the long entry was triggered. The initial risk was set at a level lower than the most recent swing low (see the chart).
The trailing stop should be based on the average real range, which is the green line, once the situation has gone in our favor. As a result, as the price rises, so does the ATR line. Until the SL is triggered, the trailing stop should always be moved in favor of the trade.
What is the best way to read an ATR trailing stop?
- Subtract 3 x ATR from Closing Price in an uptrend and plot the result as the next day’s stop.
- Add 3 x ATR to Closing Price if price closes below the ATR stop to track a Short trade.
- Otherwise, remove 3 x ATR from each successive day’s price until it falls below the ATR stop.
- We’ve also included a ratchet mechanism, which prevents ATR stops from moving lower during Long trades or rising during Short trades.
The HighLow option is a little different: during an uptrend, 3xATR is deducted from the daily High, and during a downtrend, it is added to the daily Low.
What is the most appropriate ATR period?
The volatility value will be displayed in the upper right-hand corner of the ATR indicator window. 10 is the best average real range period for trading.
What exactly is a 14-day ATR?
The average true range (ATR) is a technical analysis market volatility indicator. It’s usually calculated using a series of genuine range indicators and their 14-day simple moving average. The ATR was created for use in commodity markets, but it has since been used to all sorts of securities.