Average True Range - Is it as difficult as I think it is?

I am trying to learn from Pipcrawlers Discretionary Trading Blog. I’m using MT4 & have placed the ATR Indicator below my chart and now don’t know how to read it. According to Pipcrawler I should take the Day Open Price + ATR/2 which will give me the DATR (Daily Average True Range). I want to learn more, but cant find anymore info on how to use the ATR indicator. Very Frustrated!

I’m guessing that the answer to your question is: No, using the ATR is not as difficult as you think it is. Or, to put that another way, I think maybe you’re making the ATR harder than it needs to be.

Let’s make sure you know [B]what[/B] the ATR is, first. Then, we can talk about how to use it.

I assume that you know what these things are: [I]range, average range, true range,[/I] and [I]average true range.[/I] And I assume that you understand how an average true range (ATR) can be calculated (averaged) over periods of various length (hours, days, weeks, months) and how it can be calculated over any number of periods (from 2, on up). Finally, I assume that you know that the most commonly used ATR is the Daily ATR(14) — that is, a moving average of the true ranges of the 14 most recent days.

If any of the above is unclear to you, write back, and we’ll try to sort it out.

Like almost all indicators, the ATR is a lagging indicator — it looks back, into the recent past. The Daily ATR(14), for example, tells you that, on average over the last 14 days, price ranged (from HIGH to LOW) by x-number of pips on a daily basis. That does not tell you [I]how large[/I] the next day’s daily range will be. At best the ATR gives you a [I]probable range[/I] to look for, as a reasonable expectation. The next day’s range could easily be twice the average of the last 14 days; or half of that average. Probably, the next day’s range will be somewhere in the neighborhood of the Daily ATR(14).

PipCrawler’s methodology, which you referred to in your post, simply says that the next day’s range is likely to be about equal to the Daily ATR(14). And, if that [I]does[/I] turn out to be the next day’s range, that entire range could be above the OPEN, it could be below the OPEN, or it could be distributed around the OPEN with some of the range above and some of the range below. A conservative guess-timate of the distribution is that the probable range will be centered on the next day’s OPEN. Hence, PipCrawler adds half of the ATR to the OPEN price, and subtracts half of the ATR from the OPEN price. This places an [I]estimated[/I] next-day-HIGH, and an [I]estimated[/I] next-day-LOW, on your chart.

What should you do with these estimates? Stay within them, when establishing your profit target, and placing your stop-loss. Do not use them [I]as[/I] your profit target and stop-loss. There are much more rational ways to set your T/P and S/L, than blindly using the numbers suggested by some indicator.

In my opinion, after you have determined (1) market direction (trend), and (2) whether you are going to trade with the trend, or counter-trend, then the next step is to analyze support and resistance (S/R) levels to determine the areas where price is most likely to stall or reverse. The most promising of those levels — within the probable next day’s range — represent your best choices for your T/P and your S/L.

If you don’t find promising S/R levels [I]within that probable next day’s range,[/I] don’t go looking outside the range. Look for a better trade.

If promising S/R levels [I]within that probable next day’s range[/I] do not meet all of your trade criteria — for instance, if the R/R ratio indicated by these S/R levels does not meet your criteria — look for a better trade.

The great advantage of the MT4 platform is its ability to incorporate custom indicators. Thus, you can add a custom indicator to your MT4 platform which will automatically plot two lines on your chart — one line representing today’s OPEN [I]plus[/I] one-half of the Daily ATR(14), and one line representing today’s OPEN [I]minus[/I] one-half of the Daily ATR(14).

That being said, I’m not an MT4 user, so I can’t give you the custom indicator I just described. But …

If you haven’t done so already, get acquainted with this thread —

http://forums.babypips.com/newbie-island/36328-what-every-new-aspiring-forex-trader-still-wants-know.html#post221818

— and then search that thread for a custom indicator called ADR (average daily range). That may be just what you need.

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Surely a contender for ‘Most Complete And Helpful Answer Of The Year 2011’?!

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ireitz,
Clint’s comments highlighted above are key components that form the core of one discretionary model presented by a small group of professional traders in the following thread…301 Moved Permanently

They have a long standing association with the forum going back to 2007. As you progress through their material you’ll discover how they consistently & cleverly they use the average days range to help knit those key components together to offer a simple, clear & straightforward framework from which to prepare, observe & trade the market based around your preferred style & risk attitude.

The influence & merit of that structure is mirrored in the continued participation from (new & experienced) forum posters who have adopted & recommended the principles by carrying on the work with their contributions.

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Agreed I think I just leaned more about ATR than I cared to know but hey at least I learned something

Thanks Clint - there is a lot here for me to digest, so will go to the thread you suggest and then try to work through your answers. Bear with me - tis slow going when all is new!:rolleyes:

I checked up in Forexpedia on the first questions in you posed and answers they give there are:-

Range - The difference between the high and low of a given period
Average True Range - is the measure of Volatility of a given market. ATR is based on True Range, which is defined as greastest of the three measures 1) Difference between greates high and greatest low 2)Abosolute value of current high minus the latest close 3) Absolute value of the current low minus the latest close.
As a rule 14 measurements of True Range are used in deriving the ATR. They can be taken - within a day/daily/weekly/monthly. The first ATR in a series is simply the average True Range for 14 periods.
The measurement is useful due to its sensitivity to large fluctuations in the value of a currency across several perods of measurement, even when the difference between the high/low values for a single period are very small (which would falsely indicate a low overall volatility.
So now I think I understand what ATR is and hopefully can now learn how to use it. Thanks for your patience

Good answer Clint, I have a question too. How do you read the ATR on MT4? For example, im looking on a daily chart of EUR/JPY and I take out the ATR indicator set at a 21-day moving average. The ATR generated 1.1517. Do I read this as 17 pips? Or 51 pips?

Neither.
The daily range on that pair within the parameter you’ve set is 115 pips.

So I just move the decimal twice backwards? How about if the ATR is started off with a zero? Like 0.2919 or something?

Use the AUD/USD as an example.
Current one month average on that pair is showing as (approx) 0.0110, so just use the last 3 figures = 110 pips.
Better still, to make it even easier simply refer to a volatility calc & punch in whatever period takes your fancy.

Something like this: Forex Volatility

Got it. Thanks Thalia! Appreciate your help. Do you use ATR for S/L too?

No I don’t.
The only range information I use are the weekly averages & that’s only for a loose guide on potential price coverage.
I don’t daytrade the spot market, but if I did the average range info would form a key part of my pre trade check list.

Thanks. Useful info. I’ll be sure to keep that in mind when developing my trading system. Enjoy the rest of the week! Cheers