You, as a trader, can calculate stop loss in several ways. One is to set stop loss based on volatility (ATR) rather than a fixed number of pips.
What does ATR stand for?
ATR means the Average True Range, and it is an indicator widely used in technical analysis in financial market analysis. ATR measures volatility in the market, how much an asset moves, on average, during a given time frame. Welles Wilder Jr. has introduced ATR in his book New Concepts in Technical Trading Systems.
In Metatrader, you can add ATR as Add indicator>Oscialltors>Average True Range. The default period is 14.
How to use the ATR indicator?
To use the ATR indicator, you need to add the ATR indicator to the daily chart. Then read the ATR value from the indicator oscillator on the chart. For example, if the volatility value is 0.0090, there are 90 pips distances between daily high and low daily average. Using ATR, traders can define the target and stop-loss.
If ATR is broader, the stop-loss and the target will be more comprehensive. On the other hand, if ATR is narrow, stop-loss and target will be narrow.
See the image below:
WHEN MAKING SUCH DECISIONS, the ATR is widely used as an exit and entry determiner in markets.
This article will discuss how ATR can improve your trading and use ATR as a stop loss. Stop-loss or sl in forex represents the allowed risk for each trade.
Download Volatility Trailing Stop MT4 Indicator
Below you can Download the Volatility Trailing Stop MT4 Indicator and regular ATR indicator. You can set stop loss in the chart using this indicator based on ATR trailing stop price.
What is ATR in stocks?
ATR in stocks represents the Average accurate range volatility indicator that measures how much on average asset moves during a given time frame. For example, ATR(14) value 28.44 on the daily chart for Amazon stock means that the average distance between daily high and daily low in the last 14 days was 284.4 pips.
As the range varies, it is essential to take a designated value to measure market volatility. The generally accepted practice is to adapt the best of these: current high less the current flow, the current high absolute value less the previous close, and the current total value. It would help if you took the actual average volatility more than a moving average. It is determined by using the proper range for 14 days.
In this image, we can see on the Daily chart the Average true range. As you can see, GBPUSD is in rising volatility. Price is going down, but volatility is high. It is because of Coronavirus news.
Today, 229 pips are the daily range, and just a week ago, it was around 80 pips.
How Can Average True Range (ATR) Improve Your Trading?
As a trader, you can use a short period of fewer than 14 days to accrue trading signals. This is because more extended periods are likely to generate fewer trading signals. For example, a short-term trader wants to evaluate stock volatility for five days.
The trader could have to estimate the ATR for the five days. Then, as prices are arranged in chronological order, the trader gets the absolute value at the maximum level at the current high minus current low, the current high less the preceding close, and the total value of the current low less preceding close.
How to calculate ATR?
To calculate ATR, you need to find the difference between the highest high price and the lowest price for each bar for the observed period. For example, Daily ATR(14) will be the average distance from the highest high price and the lowest low price every day in the last 14 days.
Average True range = ATR = Average Sum (MAX (BarHigh, PreviousBarClose) – MIN (BarLow, PreviousBarClose))
You can calculate the average actual range stop loss as Daily ATR percentage or Weekly ATR percentage. By default, ATR indicator settings are 14 days. However, in trading, some traders use 24 or 30 too.
What is ATR Trailing Stop or ATR stop loss?
ATR trailing stop or ATR stop loss represents stop-loss price determination using the ATR indicator. Instead of a fixed number of pips, ATR stop loss is calculated based on current volatility. For example, if the actual average range for the last 14 days is 98 pips, a trader can set an automatically calculated stop loss to be 98 pips instead of using a fixed number of pips all the time.
Usually, ATR stop loss can be calculated based on percents, which give the trader ability to create various strategies (20% from Daily ATR stop loss, 50% from daily ATR stop loss, etc.).
ATR forex strategy
ATR forex strategy usually implies an ATR indicator to calculate ATR stop loss or ATR target price. If ATR is broader, the stop-loss and the target will be more comprehensive. If ATR is narrow, stop-loss and target will be narrow.
So how can we use ATR stop loss for the forex stop loss indicator?
We can set out a stop loss in the function of ATR.
For example :
You can set 20 pips for stop loss if there is a 100 pips average true range today. But even better you can do:
Instead of 20 pips, you can set stop loss to be 0.2 Daily ATR. If today is 100 pips range, it will be 20 pips, but if it is 150 pips range, it will be 30 pips stop loss. Your stop loss is following the current market average true range.
So in your forex stop loss indicator, you need to set stop loss as an ATR function.
The ATR can also help decide how much you should devote to derivative markets. This is important. You can use it to measure the traverser’s amount of inclination to embrace risk and the volatility in the market.
ATR stop can help in day trading
If you use the ATR as a tool in the day intraday trade chart, the ATR is likely to increase steep following market sets opening. THANKS TO THE CURRENT HIGH VOLATILITY; the ATR spurts even at the beginning of the day. The ATR can show that the volatility was more than the preceding trade day.
Once the ART reaches the maximum level, it progressively declines all day. But, of course, indicator fluctuation may not provide any information barring the price and its average value at any minute. Likewise, the ATR can show how much each asset moves and its moving trend.
You can use the ATR to determine the price reached by your asset at any minute. Such analysis helps predict the tendency in the market movement – the probable trend.
How can you use the ATR forex indicator besides entry and target?
The ATR shows the actual movement in price tendencies. To determine the time that price takes to reach profit live, divide the profit you expect by the ATR. So you can connect ATR and profit as well.
As a guide to exit the market
You can use the ATR to leave the market if you find assets price moves against your expectations. It can guide you when you should decide to exit the market.
By this, you can protect yourself against potential loss by knowing the market movement tendency beforehand.
It would help if you took note of the ATR value at the moment. Then, you can find out the applicable limit by double the ATR. Thus, when you buy a stock that is losing, you can arrest the loss at ATRx2. The loss increases and reaches the peak level and stays there until the close of trade because of the drop in price that could impact the stop loss level. For short trades as well, this mechanism works.
The author of the ATR had the intent to measure the volatility in the commodity market widely known for its volatility. However, note that ATR can also measure the volatility in stocks and indices.
When a stock experiences high volatility, it will cause a higher ATR. Contrary to this, a low volatility stock assumes a lower ATR.
Market experts may use the ATR as an instrument to influence investors – they can advise the latter to exit trades. In addition, they can use it as a valuable instrument to add to a trading system.
ATR stop is a helpful tool for market analysis to accurately scale the volatility experienced daily for any asset. This involves using simple calculations.
Be aware that the indicator does not imply the direction price moves. However, it can show you the volatility resulting from gaps and market sets limit going up; also essential to note that the ATR is simple to calculate. For this, you need data on price on a historical basis. So the starting step to calculate the ATR is finding a series of actual range values for an asset.
Before trading forex, you must gain enough fundamental knowledge to avoid unnecessary losses. Forex trading is a vast concept and requires the trader to be always well-equipped with the tools and expertise to get desirable results. Due to its round-the-clock working and highly volatile nature, there is no time for the trader to rest or blink an eye.
Knowing how to trace different Forex market sessions, how to trade Forex pairs, or how and where to use stop-loss are some of the techniques that experienced Forex traders are professionals in. Apart from these, there are tools designed especially for these techniques to be applied efficiently.
One such tool that helps the Forex trader calculate where to put the stop-loss is the Average True Range or ATR Trailing Stop Indicator. This indicator is suitable when you are trading Forex through MT4. It does not just help the Forex trader calculate where to put stop-loss but also the entry-exit points and the volatility of the Forex market.
How the ATR Trailing Stop Indicator Works on MT4
Applying the ATR Trailing Stop Indicator on the MT4 price chart reflects the stop-loss through blue and red lines. The red line above shows the stop loss or the selling positions on the price index. Similarly, the blue line below the price displays the stop loss or buying positions.
These red and blue lines are indicators that help the trader understand the ongoing trends in the market and make the buying or selling decision accordingly. The blue line indicates that the buying trend is going on, and the red line indicates that the selling position is in trend.
Indicating buying and selling trends is not the only function of the ATR Trailing Indicator. Apart from this, they also assist the trader in ascertaining the exit and entry points on the Forex price chart. It is also one of the best tools to calculate volatility.
Because of its ability to help the trader in more than one way, it is a Fotrader’ser’s best friend. Expert traders recommend this tool because of its multitasking personality. Moreover, its compatibility with the MT4 makes it a suitable match for Forex trading. The ATR Trailing Stop Loss Indicator can also be combined with other Forex trading tools and used for different functions.
The Average True Range Trailing Stop Loss indicator is the ultimate tool for Forex traders. It does not matter if you are a beginner at Forex trading or an expert, this tool is needed at all levels of expertise and can help you in more ways than one. This allows you to understand the ongoing trend in the market and, at the same time, keep a check on the volatility. Every expert Forex trader uses this tool and recommends others to use it. Its easy-to-use characteristic is another reason for it to be favored by many.
As always, never rely on only one indicator or tool for any trading. Instead, traders must explore other available options before investing their money.
The ATR indicator is a great tool that helps traders determine the right amount of money they should devote at the right time. First, of course, you should have enough exposure to the market – how to use the tool and the potential impact on the ultimate findings. Then, by using the tool judiciously, you can protect your money without having to spend a lot of time that would otherwise you squander. You can, thus, start trading on the day, and you can also sense when you should devote more money to the market, and since the threatening perception and exit the market.