What is ATR and how to use it in forex trading

• ATR is a technical indicator used to measure market volatility
• It’s a key risk management tool in forex trading 
• The value of ATR is expressed in pips
• ATR can help forex traders determine position sizes and stop-loss levels

ATR is a hugely popular indicator in forex trading. It is used primarily in technical analysis to measure volatility taking into account gaps. In forex, the value of the ATR is expressed in pips. 

The ATR indicator moves up and down, depending on how volatile the market is. A higher ATR value indicates a more volatile market with large price changes, while a lower ATR value suggests a less volatile market. 

The ATR is a dynamic indicator, meaning that its value changes as new price data becomes available. If you are using a one-minute chart, the value of the ATR will be updated every minute. On daily charts, a new ATR reading will be calculated every day. The readings are plotted on a graph to show how volatility has changed over time. The ATR provides up-to-date information on market volatility, which is highly helpful when making trading decisions.

Forex traders use the ATR indicator to help determine position size when entering a trade. For example, if the ATR value is high it means that volatility in the given currency pair is also high. In such a situation, traders may decide to use a smaller position size to reduce the risk of their trade. Conversely, if the ATR value is low, traders may opt for a larger position size. 

The ATR indicator can also be used as a reference for setting stop-loss levels. For instance, a trader might set a stop loss level at a distance of 2-3 ATR values below or above the entry price, depending on their risk tolerance and current market conditions.

If you are a beginner, we recommend you open a demo account at a forex broker and trade with virtual money at first until you learn how to use the ATR and develop your own trading strategy. Most of the brokers in our top list of the best forex brokers in the world provide a demo account free of charge. 

The first step in calculating the ATR is to calculate a series of true ranges (TRs). The true range is the largest of the following:

• Current high minus current close
• The absolute value of current high minus previous close
• The absolute value of current low minus previous close

Once you have your TR, you will need to apply the following formula: 

ATR = (Previous ATR * (n - 1) + TR) / n

Where:

ATR = Average True Range

n = number of periods

TR = True Range

As a general rule, the ATR is calculated using 14 periods, which can be intraday (i.e. minutes or hours), days, weeks, or months. If you want to measure more recent volatility, you can use a shorter period. For longer-term volatility, use longer periods.

Let’s say you have $10,000 in your trading account and you want to buy EURUSD. In order to calculate a proper stop-loss distance and position size, you decide to use ATR.

First, you need to set the time frame of the ATR. If you trade on daily charts, you should determine the number of days the ATR will use. If you set the ATR to calculate with the previous 100 days, you will use ATR(100).

The value of the ATR will indicate daily volatility over a 100-day period. Let’s say the ATR(100) is 50 pips. In order to have your stop-loss distance, you should use multiples of ATR so that an average movement in the market won’t stop you out. If you choose 2x ATR, you will have 2 x 50 pips, which is 100 pips. If the EURUSD exchange rate is at 1.1000, the stop-loss will be 100 pips below that value, which is 1.0900.

If you want to risk 1% of your account balance with this stop-loss distance, the proper position size will be 0.1 lots, since 1 pip value in the EURUSD currency pair is $1 for a 10,000 volume. The formula used: 100 x $1 = $100 (1% of $10,000).

If the value of the ATR indicator rises because there is increased volatility in the market, the parameters of your trade will change. 

Staying with the same trade idea: if higher volatility drives up the value of your ATR to 100 pips and you work with 2x ATR, the result will be 200 pips. Consequently, your stop-loss will be at 1.0800 (not 1.0900 as in the previous scenario). The position size should be half of the previous one (maintaining the 1% risk). In this case 0.05 lot will be the proper lot size because 1 pip value in the EURUSD currency pair is $0.5 for 5,000 volume. The formula used: 200 x $0.5 = $100 (1% of $10,000).

Is ATR a good indicator?

The ATR is a useful indicator for measuring market volatility because it takes into account gaps. Note, however, that the ATR does not show the direction of the market, so a rising ATR will not signal either selling pressure or buying pressure.  

How do you read the ATR indicator in forex?

When the value of the ATR is high means there is high volatility in the market with large price changes in either direction. A low ATR reading indicates low volatility with small prices changes.

How to use ATR in trading?

Typically, forex traders use the ATR when calculating the size of their position and the stop-loss level of a given trade.