Am a little bit confused, am trying to set my stoploss using average true range but I ran into the problem of reading it. When I insert the atr indicator into my chart I see two values, one on top and one at the bottom. It comes in the point related to the pair am trading like EURUSD it comes in five decimal places. When I use crosshair tool to find my range it shows the value in the quote currency rate. So now how do I determine the value of the atr, is it by using the value that shows with the crosshair lines or minus that value from the highest value in the atr to get the pip value. Am so confused about this and theres no content on the internet explaining it in details.
Where to start. In my working career I have been analyzing data for over 40 years. So a lot depends on whether you understand what you are doing and why you are doing it. First of all, the ATR(20) on the lower part of the graph represents the average change in value of the underlying pair (in this case the the AUDUSD. The (20) means “the last twenty timeframes, or candlesticks”. Apart from the last 20 candlesticks, the average change is fairly steady and around the 0.00728 value (i.e. the average change would have been 0.00728. So up till 20 candlesticks ago, setting the stop loss at 0.078 below, say, an entry of 0.0066 would have meant that if the trade had moved against you by 0.078 it would not have stopped you out. However, note that the value of the ATR(20) moved quickly during the last 20 time periods from around 0.00728 to 0.02767 - about four times the previous average true range. So now, if you want to set a stop loss below the average true range, you would have to set it 0.02767 below your entry (to Buy) which is 3.8 times the previous stop loss. So your risk is 4 x what it was twenty candlesticks ago. Also note that the ATR, by nature of the fact that it is an average, shows the lower graph shifted to the right from the upper part (the candlesticks), and it is likely that it has not yet reached the average value of the next candlestick, so may be under-estimated. Caution should be exercised during such relative volatility. The more volatile the market, the less reliable is the adage “choose a stop loss greater than the ATR”. If this makes no sense I am not surprised. A lot is assumed of the knowledge of the trader in terms of arithmetic, graphs and their meanings. By no means do I wish to appear condescending, but following rules without understanding their range of applicability and their underlying reason for being rules (or guidelines) is not a good idea. In this case, I would not use the ATR (number of time periods) as a guide. The last doji candle is “indecision” so I do not see a setup on this price action.
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