5.6 Trading Average True Range (ATR) instructions Video Lecture | Forex: Learn and Master Trading (English) - Business Basics

welcome back to capex forex trading comm
in this lesson we're going to focus on
the Average True Range which is also
known as the ATR we're going to discuss
two ways in which this indicator can be
used number one we're going to discuss
how we can use is low volatility
readings to get into a new trend and
number two we're going to show you how
we can use its readings to assign an
appropriate stop-loss for our trading
that's relative to the volatility of
current prices now the sole purpose of
the ATR indicator is to measure
volatility and it does that by plotting
it on a line that you see here
so obviously the higher the line goes
the higher volatility the lower the line
goes the lower the volatility so don't
get confused about direction because
this indicator does not concern itself
with direction so just because the line
is going up does not mean that it's
measuring an uptrend only in fact in
this example it is this downtrend here
that's been measured in terms of
volatility in another example you can
see that the line is going up here but
we have an uptrend that is measured here
so remember this does not identify
direction it simply measures strength so
as we mentioned earlier the first way in
which we can use the ATR indicator is to
identify low levels of volatility that
enable us to get into a new trend so the
first thing that we need to do is
identify where low volatility actually
is now for some reason some traders use
the reading of not point naught naught
naught 1 as a reading of low volatility
now that reading is way down here below
my indicator window which I can't reach
and as you can see when we're trading to
one our timeframe that reading of low
volatility doesn't really work because
there's no touches of the horizontal
line there's no reading or bit below
that line that will tell me that the
charts or the prices are in low
volatility so we find that the reading
of no point naught naught naught 6 is an
almost perfect reading of low volatility
now you don't have to use that reading
what you can do is have a look at
historically where the trends have been
and ended began and ended and then
associate the dips or touches below the
horizontal line with the beginnings of
these trends so as you can see here if I
get my cursor we have this area where
the indicator has dipped below a
horizontal line but we also have a
beginning of a new trend in the price
chart here and we've got the same here
we have a a reading below the horizontal
line and we also have a new downtrend
that begins at the exactly the same
point okay so have a little play with
your charts depending on which
timeframes you use but if you are using
the one hour time frame a reading of no
point naught naught naught six should be
good enough for you so when we're using
the ATR in this manner the low
volatility reading itself is not enough
to get us into a new trend the reason
why is because all this shows is that
the current trend has run out of steam
it doesn't tell us that a new one has
began for that we need two simple moving
averages the first one is the eighth
period simple moving average and the
second is the 21 period simple moving
average and what we're looking for in
this scenario are two things one we need
prices to be above the eighth period
moving average if we're trading upwards
and we also need a crossover of the two
averages and that's exactly what we get
here
so if I draw a horizontal line that
identifies the point at which all of
this has happened that'll be here so
we've got prices above and we've got the
crossover and we also have a low
volatility reading that's already
happened so we're almost good to go to
take this trade but the last thing we
need to do is check the four-hour time
frame to ensure the same has happened so
we've got prices above the eighth period
simple moving average and the averages
themselves have already crossed over so
the uptrend looks like it's going to be
very strong we'll go back to the age 102
one hour time frame it would take this
trade there so that's how you would use
this indicator to get into a new trend
now the last way in which we can use the
ATR is by using is readings to assign an
appropriate stop Lots that's relative to
the
currency pairs volatility and I'll
explain that in a little bit more detail
here so what I've got in front of me
here a to chart chart a and chart B now
chart a moves about 100 pips per day
chart B moves 200 pips a day so let's
say we've taken a trade out at exactly
the same time time in both of these
charts in chart a we assign a 10 pitch
stop loss to our trade now we chart B we
cannot assign a template stop-loss
because it's not relative to the
currency pairs volatility it is only
relative to chart a volatility so
because chart B moves double the amount
of points to that of chart a technically
we should set a stop loss that's double
the size for that would be 20 pips but
this is exactly what the ATR indicator
allows us to do now the most common
formula is to place a stop loss to 80
hours away from current market price now
I'm going to explain this in a much more
simplified manner so the only thing
you've got to do for example if we're
looking into chart a is have a look at
the current reading of a TR and that
reading is 8 what you need to do is
multiply 8 by 2 to give us 16 and then
place a stop loss 16 pips away from the
current market price in this chart now
if we're looking at chart be our ATR
reading is 14 so we would multiply 14 by
2 to give us 28 and we would place a
stop loss as 28 pips away from the
current market price so by doing this it
allows you or it allows your tray to
have room to move around and the
readings that you using for the ATR
relative to your stop-loss are specific
to the charts that you're looking at and
they're not general in across the board
of all the currency pairs ok so that
completes this lesson if you have any
questions or comments do let us know
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