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The Complete Guide to ATR Indicator 

 May 10, 2018

By  Rayner

Last Updated on

I love the Average True Range (ATR) indicator.

Because unlike other trading indicators that measure momentum, trend direction, overbought levels, and etc.

The ATR indicator is none of it.

Instead, it’s something entirely different.

And if used correctly, the Average True Range is one of the most powerful indicators you’ll come across.

That’s why I’ve written this post to explain the awesomeness of the Average True Range indicator.

Here’s what you’ll learn:

Or if you prefer…

You can watch this training video below:

Or else, let’s get started…

ATR indicator explained — what is it and how does it work

The Average True Range is an indicator that measures volatility.

It’s developed by J. Welles Wilder and was first mentioned in his book, New Concepts in Technical Analysis Systems (in 1978).

Now you might be wondering:

“How is the ATR values calculated?”

Well, it’s done using 1 of 3 methods, depending on how the candles are formed.

Here’s how…

Method 1: Current high less the current low

Method 2: Current high less the previous close

Method 3: Current low less the previous close

Confused?

No worries, just look at the image below…

ATR Indicator

As you can see:

Example A: The current candle’s range is larger than the previous candle, we use method 1.

Example B: The current candle closes higher than the previous candle, we use method 2.

Example C: The current candle closes lower than the previous candle, we use method 3.

The takeaway is this…

The larger the range of the candles, the greater the ATR value (and vice versa).

The ATR indicator is NOT a trending indicator

Now…

A mistake traders make is to assume that volatility and trend go in the same direction.

Nope!

Recall:

The Average True Range indicator measures the volatility of the market.

This means volatility can be low while the market is trending higher (and vice versa).

Here’s an example: The S&P is trending higher while volatility is heading lower…

Does it make sense?

Good.

Then let’s move on…

How to use ATR indicator to “hunt” for EXPLOSIVE breakout trades (before it occurs)

Here’s a fact:

The volatility of the markets is always changing.

It moves from a period of low volatility to high volatility (and vice versa).

This means that when the market is in a low volatility period… you can expect volatility to pick up, soon.

So, how do you use this knowledge to find explosive breakout trades before it occurs?

Here’s how…

  1. Wait for volatility to reach multi-year lows (on the weekly timeframe)
  2. Identify the range during this time period
  3. Trade the break of the range

Here are a few examples:

Brent Crude Oil multi-year low volatility followed by a break of Support…

Eurusd multi-year low volatility followed by a break of Support…

Do you notice how these explosive moves occur after a period of low volatility?

Are you sick of getting stopped out of your trades prematurely? Here’s how to fix it…

Let me ask you…

Have you ever put on a trade only to watch the market hit your stop loss, and then continue moving in your expected direction?

It sucks, right?

And that’s because your stop loss is “too tight”.

So, what’s the solution?

Give your trade room to breathe.

This means your stop loss should be wide enough to accommodate the daily swings of the market.

Now you’re probably wondering:

“But how much is wide enough?”

Well, you can use the ATR indicator to help you with it…

  1. Find out what’s the current ATR value
  2. Select a multiple of the ATR value
  3. Add that amount to nearest Support & Resistance level

So…

If you are long from Support and have a multiple of 1, then set your stop loss 1ATR below the lows of Support.

Or if you’re short from Resistance, and have a multiple of 2 then set your stop loss 2ATR above the highs of Resistance.

An example:

Need more explanation?

Then go watch this training video below where I’ll explain how to use the ATR indicator to set a proper stop loss – so you don’t get stopped out “too early”.

How to use the ATR indicator and ride BIG trends

Here’s the thing:

If you want to ride massive trends in the markets, you must use a trailing stop loss on your trades.

The question is… how?

There are many ways to do it, but one of the popular methods is to use the ATR indicator to trail your stop loss.

Here’s how…

  1. Decide on the ATR multiple you’ll use (whether it’s 3, 4, 5 and etc.)
  2. If you’re long, then minus X ATR from the highs and that’s your trailing stop loss
  3. If you’re short, then add X ATR from the lows and that’s your trailing stop loss

And to make your life easier, there’s a useful indicator called “Chandelier stops” which performs this function.

Here’s an example of the 5ATR as a trailing stop loss:

Now you’re probably wondering:

“So Rayner, which is the best ATR multiple to use?”

Well, the truth is… there’s no best ATR multiple.

If you use a smaller ATR multiple, then you’ll ride a small trend (and the time held on the trade is shorter).

If you use a bigger ATR multiple, then you’ll ride a bigger trend (and the time held on the trade is longer).

So which approach suits you best?

Only you can answer that question yourself.

Moving on…

Using ATR to set profit target, here’s how it works…

Now if you don’t want to ride trends, you can also use the ATR indicator to set a target profit.

Here’s how it works…

You know the ATR indicator tells you how much a market can potentially move for the day.

So…

If EUR/USD has a daily ATR of 100 pips, it moves an average of 100 pips a day.

This means if you’re a day trader, you can have a target profit of about 100 pips (give and take) and there’s a good chance it’ll be hit.

Of course, you don’t want to “blindly” set a 100 pips target profit.

Instead, combine it with market structure (like Support & Resistance, swing high & low, etc.) so you know where the price might reach for the day.

Here’s an example:

Let’s say EUR/USD moves an average of 100 pips a day, again.

You went long at support and you’re not sure where to take profits.

There are 3 possible Resistance levels: 30 pips away, 80 pips away, and 200 pips away.

Which do you choose?

The 30 pips target is likely to be hit within a day but you’re leaving money on the table as the market could move 100 pips a day.

The 200 pips target is unlikely to be hit within a day (as it’s more than the ATR value).

The 80 pips target is your best option as it’s within the daily ATR value (and offers more than 30 pips).

Here’s what I mean…

Three possible targets on EUR/USD 1-hour:

ATR Indicator
So here’s the takeaway…

  1. Identify the daily ATR value
  2. When you set your profit target, combine it with market structure and ensure the distance is less than the daily ATR value

Pro Tip:

If you trade longer-term, you can refer the weekly or monthly ATR value.

Next…

How to find “exhaustion” moves and time market reversals

I’m sure you agree nobody can work “forever” without exhaustion.

After an hour or so, most of us will need a break to recharge.

But wait.

Why am I telling you this?

Because the market is just like you, it can only “work” for so long before taking a break.

This means there’s a good probability the market will “exhaust” itself after hitting its limits.

Now you might be wondering…

“How do you tell what’s the limit?”

Well, you can find out using the Average True Range indicator.

Here’s how…

  1. Identify the current ATR value
  2. Multiply it by 2
  3. If the market moves 2 times the ATR value, then it could be “exhausted”

Now, I don’t suggest you trade this concept in isolation.

Instead, combine it with Support & Resistance and you’ll find yourself identifying market reversals ahead of anyone else.

Here’s an example: GBPJPY has a weekly ATR value of 300 pips…

ATR Indicator

And now, you realized GBPJPY has moved 500 pips (close to 2ATR) and it came into an area of Support.

Then, it forms a large Bullish Engulfing pattern on the Daily timeframe.

Now… what do you think will happen?

Well, I can’t say for sure.

But you have an “exhaustion” move, the price coming into an area of Support, and a Bullish candlestick pattern that signals the market could reverse higher.

Conclusion

Here’s what you’ve learned:

  • The Average True Range (ATR) is an indicator that measures the volatility of the market
  • You can use the ATR indicator to identify multi-year low volatility because it can lead to explosive breakout trades
  • You can set your stop loss 1 ATR away from Support & Resistance so you don’t get stopped out prematurely
  • If you want to ride a trend, you can trail your stop loss X ATR away from the highs/lows
  • When the market hits 2 ATR or more within a day, it tends to be “exhausted” and could reverse

Now here’s my question for you…

How do you use the Average True Range indicator?

Leave a comment below and let me know your thoughts.

  • Thanks Rayner for this piece. Very informative. But please, some of us learn better by watching. So please could you do a YouTube video explaining how to use this ATR practically. It will be greatly appreciated. Cheers

  • Your example or illustration concentrated on Year-Low or Multi-Year Low and then Weekly and Daily. I expected you should’ve given example with lower Time Frames as well or is it only more credible with the higher Time Frames? Reason, we need to know if it’s safe to apply it in Day Trading in the same way you explained here.

  • Hey Rayner,

    Wanna confirm one thing. In your video on stop loss placement with ATR you mentioned about 2xATR from entry price but here you mentioned 1xATR from entry price. Any reason for this difference? And which one is best to follow 1xATR or 2xATR?

    Regards

  • “When the market hits 2 ATR or more within a day, it tends to be “exhausted” and could reverse”
    This is a last point in your conclusion. When you say 2 ATR or more within a day what it means it’s in a day or in a candle ?
    The example you given in the weekly chart is showing within a candle. Please explain.

    • The concept can be applied to daily weekly or monthly timeframe.

      Essentially, when the market exceeds 2 times ATR value, there’s a chance it could reverse from it.

  • Is there a way to scan/screen for weekly ATR on Think or Swim or Finviz? I can’t find anything to scan for ATR on ToS, and only on the daily for FinViz

  • For exhaustion from which level we have to count
    Ex.
    Current ATR is 220 on x date and rate will be 1000 so how to count exhaustion value
    Is it 1440 level or what

  • Hello Rayner, what setup do you recommend? When you insert the number, what should it be? I mean automatically it´s 14, so it is for last 14 candles, right? What do you think is the most suited number for swing/position trading?

  • Hi Rayner, thanks for the post. Quick question I use yahoo finance charts, and the ATR at my entry point says 0.109 and I want to use a 4x multiplier, so that would be 0.436. And my entry price was $4.16. So then what would my stop loss be? I’m a little confused. Thanks!

  • This is my first time of getting more confused after reading ur material (usually, I always understand when I read ur material )my problems are how do u get to apply the ATR indicator. You only have explained how the ATR works.

  • I really very disappointed about pro traders edge course. I purchased it last week and I didn’t find anything useful I only get one weekly chart video and not more than that all books are paid no any other help no customer service I tried to contact your team about 5 days ago and I am still waiting. Very poor . No price action training videos no breakout

    • Hi Muhammad

      The Pro Traders Edge comes with market analysis published each week.

      Also, you get access to our archive of PDF collection, Mean Reversion Trading Strategy, Trading Webinars, Backtest research lab, and much more. So, I’m puzzled if you said you only get the weekly videos.

      Lastly, our customer support usually gets back to you within 1 business day and there’s a possibility your email might be in spam or didn’t reach us.

      Anyway, I’ve refunded you back your money since you didn’t get value out of it.

      Best!

  • I’m using Investagrams and I can’t seem to get the same ATR setting as you. My ATRs are in decimals. What am I doing wrong?

  • The use of ATR is another tool worth practising for successful trading.If we follow all the articles submitted I have no doubt that one can become a professional trader

  • Thanks Rayner, after listening to an audiobook on Richard Dennis i have always wondered how to have volatility on a chart.
    Also I learnt a satisfying method for a stop loss.
    Thanks so much.

  • Hello Rayner,

    TradingView, provided by our broker (ZERODHA), doesnt have Chandelier stops, SuperTrend is very close for considering trailing SL. Please do share your thoughts.

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