Welcome to the next Stonehill Forex Indicator Study. This research represents an investigative look into how and why some indicators work and some don’t work as well.
Our Next Indicator Choice is…
We’ve chosen the ATR (AVERAGE TRUE RANGE) as our next indicator choice. The ATR (Average True Range) is part of the MT4 platform indicator set. The reason why we decided to review this indicator is because it is the most important indicator. An “evergreen” indicator, the ATR was introduced by J. Welles Wilder Jr., a market technician, in 1978. We wanted to get this blog up now to give context to future blogs, which will include the ATR as part of the discussion. So, let’s get onto how to use the Average True Range!
The ATR is the single most essential tool for Money Management. And Money Management is a vital part of Forex trading because…NO MONEY MANAGEMENT = NO MONEY! Most traders who do use it, use it the wrong way and are part of the 99% who can’t make money. Don’t be like them.
What Kind of Indicator is It?
The ATR is not an entry, exit, confirmation, baseline, or volume indicator. It is a stand-alone tool and the first instrument for our trading toolbox. It is considered a “below chart” indicator as it lives below your chart in a separate window.
* The basis of your money management profile
* Takes guesswork out of your trading
* Helps with your trading psychology
A Window to Profit
Below is a screenshot of what the indicator looks like on the daily time frame. Note that we’ve changed the color of the candles to white to remove any emotional bias so that only the indicator is prominent.
The only setting is; ATR Period. The default setting is 14, and we leave it as such. Before we take a closer look, I’ll explain what each parameter represents.
ATR Period: This setting controls the number of periods used to calculate the value of the signal. The true range indicator is calculated by averaging the difference between the periods’ high and low, creating a moving average of the true ranges.
How we Use it
We use the ATR to give us the average number of pips a currency pair has moved in the last specified number of periods. We’ll explain this in more detail shortly. But first, we want to illustrate what parts of the indicator we actually use.
The (14) represents the number of periods the ATR is calculating. Remember, 14 is the default value…and the value we use.
The second number; 0.00748 represents the number of pips calculated by the 14 period of the ATR. While the number shown is 74.8 pips, we disregard the “pipette”, or the decimal, and only use 74. Trust us, it makes things easier and will make virtually no difference in your calculations. You don’t even have to bother rounding it.
Let’s discuss the blue line for a moment. Simply stated, we don’t need it, and we don’t use it. If you need to check the past value of an ATR, just place your arrow under the appropriate period……like this.
Here, we see that on April 5, 2021, the ATR of the EUR/USD on the daily time frame was 65 pips (remember to disregard the decimal).
Two Main Functions
1. The ATR is used to calculate trade values such as; stop loss, take profit and is used in the maintenance of an open trade.
2. The ATR is also used to calculate the correct size of the trade when applying risk because not pairs move the same. Let’s look at two currency pairs as examples.
A fast moving pair; the Pound against the Kiwi (GBP/NZD) and a slow moving pair; the Euro against the Pound (EUR/GBP).
Looking at the picture below, we see that on the same day (September 29, 2021) the ATR for the EUR/GBP is 47 pips and the ATR for the GBP/NZD is 127 pips.
Using mental math, we can calculate that the Pound Kiwi moves about 3 times faster than the Euro Pound or that the Euro Pound moves at about ⅓ the speed of the Pound Kiwi. You don’t have to be super precise here, approximate values work fine.
If you are curious as to what money management we use in the No Nonsense Forex way of doing things and how to use the Average True Range our way, that information can be found in the advanced course…which can be found by clicking HERE.
As we did with past indicator studies, we’ve made indicators available for download on our site from the indicator library. Since the ATR is part of the MT4 package, you shouldn’t have to download it, but if your version does not, it is available for download free from the indicator page. When you’re ready to get it, click HERE.
For a quick technical read about this indicator, take a look at an article at the Fidelity website; Average True Range
More to Come
There’s a lot more to come. We are excited to provide more trading tips in the near future. Sign up on our contacts page or subscribe to our YouTube channel. Receive early notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.
And, now you are aware of the best indicator in the world…and, we’ve given you some hints as to its capabilities.
Our only goal is to make you a better trader.
BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.