ATR Trading Strategy: Day Trade FX With Average True Range

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

The key to success in trading is about maximizing your profits and minimizing risk.

The Average True Range Trading strategy will help you to achieve just that. The Average True Range indicator, or the ATR indicator, will help you to reach this goal. Our team at Trading Strategy Guides will show you how to use the ATR indicator to accomplish 2 things:

1. How to use the ATR indicator to measure stop loss placement.
2. How to use the ATR indicator to measure profit targets.

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ATR Trading Strategy: Introduction

The ATR trading strategy can be successfully applied to any intraday, swing, or day trading time frames and bigger time frames. It can also work on different asset classes. The main idea behind the Average True Range Trading strategy is we only want to trade when the market is ready to accelerate.

If we identify how much the price moves on average, this can be helpful to achieve consistency in trading. This can be accomplished by using the ATR Indicator.

Nowโ€ฆ

Before we move forward, we must define the ATR indicator. Youโ€™ll need this for the Average True Range Trading strategy and how to use it.

ATR Indicator Explained

Simply put, the ATR indicator measures the volatility of price changes in any security or market. In this regard, the ATR is a universal indicator. The ATR Indicator can be used to trade anything including stock, forex, commodities, and cryptocurrencies.

Atr Indicator
Atr indicator

The ATR indicator measures the volatility in pips. This is a great way to read the market volatility. Simply knowing the volatility of the last day or the last hour, doesnโ€™t provide us with enough data to be able to make an informed decision. This is why the ATR indicator determines and plots the average of a specific number of sessions.

By default, the ATR indicator is set to 14. So, if youโ€™re on the daily chart, the ATR indicator will show you the average volatility from high to low over the past 14 days. By contrast, if youโ€™re on the 1h chart, the ATR indicator will display the average volatility over the past 14 hours.

Average True Range Interpretation
Atr indicator volatility

The ATR indicator will display the volatility value in the top right-hand corner of the ATR indicator window.

The best average true range period to trade with is 10. Our team at Trading Strategy Guides has found out through extensive research that 10 sessions or 10 periods is the perfect number to measure the volatility.

How to Use the ATR Indicator

The ATR indicator is an important indicator. When used in the right way, it can grow your profits and decrease your losses. The biggest misconception about the ATR indicator is that traders mistakenly believe a higher ATR value means a bullish trend and lower ATR value means a bearish trend. This is wrong and far from the truth.

The ATR indicator doesnโ€™t say anything about the trend direction.

However, to some degree, with the help of the best ATR Forex strategy, we can determine the market trend. This can be done by looking at the general ATR value relative to the trend direction.

In the figure below, we demonstrate how the ATR volatility changes notably during different stages of the trend.

Average True Range Trading Strategy
Atr indicator eurusd

What we can notice is that during up-trends the ATR indicator tends to post lower volatility. During downtrends, the ATR indicator tends to post higher volatility. The reason behind this ATR volatility phenomenon is given by the fear factor.

What do we mean by this?

Well, as the old trading saying goes, โ€œMarket take the stairs up and the elevator down.โ€ Itโ€™s the way the market has been functioning for centuries.

Moving forward, weโ€™re going to introduce you to an unconventional way of doing technical analysis. Weโ€™re going to apply the 20-day moving average over the ATR indicator. Many platforms will allow you to accomplish this. However, if you are not able to perform this action on your platform, we highly recommend you use the free web-based platform TradingView.

How to Overlay Indicators Over Another Indicator

Using the TradingView platform, after you have attached the ATR indicator, simply move with the mouse cursor over the ATR indicator window. Right-click and select, โ€œApply Indicator on ATR.โ€ Another window will pop up from where you can select a Moving Average using a 20 period.

How To Read Atr Forex
Atr indicator tradingview

Letโ€™s be quite frank here, youโ€™ll not find this kind of stuff anywhere else. Our team at Trading Strategy Guides has been using an unorthodox approach to trading. This is one of the reasons why we have been extremely successful.

Now, itโ€™s time to show you a real demonstration of how the ATR indicator works. You can get more comfortable incorporating this amazing indicator into your trading strategy.

Average True Range Trading Strategy

(Rules for Buy Trade)

Step #1: Make Sure Your Chart Setup Configuration Looks the Same as our Price Chart

The Average True Range Trading strategy has a chart configuration with two windows:

  1. The first window should contain your favorite currency pair.
  2. The second window should contain the ATR indicator with the 20-EMA attached to it (use the above instructions in order to overlay the 20-EMA).
Best Average True Range Forex
Atr indicator window

Now that we have our chart properly configured, itโ€™s time to move to the next step of the best average true range Forex strategy.

Step #2: Wait for ATR Indicator to Break Above 20-EMA

A breakout in the ATR indicator reading above the 20-EMA is indicative of higher volatility to come. With higher volatility, this also means trading opportunities and bigger profits to be made. A break of the ATR line above the 20-EMA can be great proof of a new trend.

Atr Trading Strategy
Atr indicator strategy 1

The Average True Range Trading strategy incorporates not just the ATR volatility readings, but it also looks at the price action to confirm the increase in the ATR volatility. This brings us to the next step of the best average true range Forex strategy.

Step #3: Check the Price Chart to Ensure the ATR Breakout is Followed by a Price Breakout

After the ATR line broke above the 20-EMA we want this to be followed by a break in price as well. If weโ€™re looking to buy, we want to see a big bullish candle relative to the previous candles popping up on the chart. If the price breaks up and is accompanied by a break higher in volatility, there is a high probability of the market moving in the same direction.

Atr Indicator How To Use
Atr indicator strategy 2

Now, all we need to establish is how to enter the trade. If we already have an idea of where the market is most likely to move. This brings us to the next step.

Step #4: Enter Long Once We Break Above the High of the Breakout Candle

Depending on your preferred time frame, youโ€™ll have to wait until the breakout candle has been developed. Then enter long once the next candle breaks above the high of the breakout candle.

This is key to the success of the Average True Range Trading strategy. You need a big bold candle to confirm the ATR breakout. Youโ€™ll learn soon that the ATR indicator will break many times above the 20-EMA. But it wonโ€™t be confirmed by the price action in which case you donโ€™t want to execute any trades.

Average True Range Trading Strategy
Atr indicator strategy 3

The ATR indicator is a great tool to use when it comes to establishing profit targets. This brings us to the next step of our Average True Range Trading strategy.

Step #5: Your Take Profit Target Should Be Equal to the ATR Indicator Value

The ATR indicator can be of great help to determine your take profit target. This is self-explanatory because if you know how much, on average, the market is prone to move, we want to conform to this reality and have that as a target.

In our case, we can see the ATR volatility reading has a value of 16 pips.

This means our profit target should be calculated 16 pips above the high of the breakout candle. The breakout candle high is at 1.1255 and adding 16 pips to that price we end up with a profit target at 1.1271.

Using Atr To Set Profit Target
Atr indicator strategy 4

Itโ€™s not over until you know where to place your protective stop loss. This brings us to the last step of the best average true range Forex strategy.

Step #6: Place the Stop Loss below the Breakout Candle Low

In trading, you have to learn to always protect your back and hide your protective stop loss at the most logical point. A break below the breakout candle low will invalidate our trade idea. This is the place where we want to hide our protective stop loss.

Best Stop Loss Strategy
Atr indicator strategy 5


Note** The above was an example of a buy trade. Use the same rules โ€“ but with the only difference that you need a bearish breakout candle โ€“ for a sell trade. In the figure below, you can see an actual SELL trade example using the best average true range forex strategy.

How To Use Average True Range For Short-Term Trading
Atr indicator strategy 6

ATR Trading Strategy Video

Click here for more information.

Conclusion: ATR Trading Strategy

The ATR Trading strategy provides you with an unorthodox approach to trading. It combines both market volatility and price action to provide us with the best trades possible. We hope that by now youโ€™re sold out to the power of the ATR indicatorโ€™s ability to forecast the market with a high degree of accuracy.

Thank you for reading!


ATR Trading Strategy PDF Download

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Best Average True Range Trading Strategy Pdf Infographic
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15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

8 Comments

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  1. It has a bad risk to reward ratio, it is clear that the breakout candle will be much bigger than the next candles and the tp is just few candles down or up, while the sl is below/above the breakout candle. Therefore it gives negative risk to reward ratio..

  2. Clarification pleaseโ€ฆ..for BOTH a short or a long entry, you are waiting for the ATR to move ABOVE the 20 ema? Correct?

  3. This is look great , I will try this
    Thanks
    But I thought while I am reading you will use ATR for identify stop loss

  4. The 20-EMA will give the direction of the trend. .i.e. if the 20-EMA is going up, when the ATR is crossing up, then it can be considered a bullish trend. If the 20-EMA is moving down then the tend is bearish.

  5. Excellent web site. A lot of useful information here. Iยฆm sending it to several pals ans also sharing in delicious. And of course, thank you on your sweat!

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