How to Use ATR in a Forex Strategy

Forex traders can use ATR to gauge market volatility.

Traders should use larger stops and profit targets as ATR increases.

Reading ATR can be made easier through the use of the ATR in pips indicator.

ATR (Average True Range) is an easy to read technical indicator designed to read market volatility. When a Forex trader knows how to read ATR, they can use current volatility to gauge the placement of stop and limit orders on existing positions. Today we will take a look at ATR and how to apply it to our trading.

Learn Forex –EURJPY Trend with ATR

(Created using FXCM’s Marketscope 2.0 charts)

ATR is considered a volatility indicator as it measure the distance between a series of previous highs and lows, for a specific number or periods. ATR is displayed with a decimal to indicate the number of pips between the period highs and lows. This is important to a trader, as volatility increases so will a charts ATR value. As volatility declines, and the difference between the selected periods highs and lows decrease, so will ATR.

Traders can use ATR to actively manage their position in accordance to volatility. The greater the ATR reading is on a specific pair the wider the stop that should be used. This makes sense as a tight stop on a particularly volatile currency pair is more prone to be executed. As well a wide stop on a less volatile pair may make stops unnecessarily large. This can also hold true with limit orders. If ATR is a higher value, traders may seek more pips on a specific trade. Conversely, if ATR is indicating volatility is low, traders may temper their trading expectations with smaller limit orders.

Learn Forex –ATR in Pips Indicator

(Created using FXCM’s Marketscope 2.0 charts)

The ATR in pips indicator is a custom indicator for the Marketscope 2.0 charts found inside of the FXCM Trading Station. This indicator was designed to help traders interpret the ATR values of their favorite currency pairs. It does this by taking the decimal value of the traditional ATR indicator and turning it into an easy to read number translated into a specific number of pips. Notice in the EURJPY example above, the ATR in Pips indicator has conveniently converted the .96 value seen in our first graph to a simple to decipher 96 pips.

 

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