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Average True
Range
By

Marcille Grapa

www.SurefireTradingChallenge.com

www.SurefireTradingChallenge.com

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.................................................................................................................................. 13 Entry.................................................................................................................................................................................................................................................................................................................................................................................................. 14 Take Profit ....................................................................................................................................... 4 Definition of Terms & Related Concepts.................................................................................... 22 Comments/Notes .............................................................................................................................. 13 Stop Loss .................... 17 Rules:..... 22 Conclusion............................................................................................................................................................................................... 11 Low ATR Reading ............................... 15 Application: ATR-Filtered SMA System................................................................................................... 11 High ATR Reading................ 9 Adaptive To Changing Market Conditions ........................................................................................................................................................... 4 Calculation/Formula .............................................................................................................................................................. 18 Examples .............................................................................................com AVERAGE TRUE RANGE Table of Contents RISK DISCLOSURE STATEMENT / DISCLAIMER AGREEMENT................................................................ www......................................................... 12 Uses ............................................ 10 Interpreting the ATR .................................................................................................................... 14 Example .................................................................. 6 Advantages ............................................................................................................................................................................. 2 Introduction ................................................................................................................................................................ 9 Useful Across Different Financial Securities.............................................................................................................. 22 ............................................... 19 Video....................................................................................................................................SurefireTradingChallenge..........

What’s very interesting about this indicator is its universal and adaptive nature. RSI and the Directional Movement Concept) in his book. the ATR may be one of the oldest indicators that exist but it is far from being obsolete. who introduced it along with a few other indicators (Parabolic SAR. stop loss levels and take profit levels with reasonable money management technique. The Average True Range reveals the volatility in a particular instrument but it does not indicate the price direction. “New Concepts in Technical Trading Systems” in 1978. Definition of Terms & Related Concepts Before we proceed. so does the volatility of the instrument. The ATR has numerous functions and it’s generally applicable in finding trade setups. Many trading systems use the ATR as an essential tool for measuring the volatility of the market. it also increases. Volatility is defined in terms of market action. Jr. an instrument that typically has gaps and limit moves that occur when a commodity opens up or down its maximum allowed move for the session. Welles Wilder. Any trader who is keen on designing an excellent trading system should be familiar with the Average True Range and the many ways it can be used to improve the performance of any trading system. It is a “moving” average of the true range for a specific given period. Volatility is directly proportional to the range. The ATR was originally designed by Wilder to appropriately measure the volatility of Commodities.com AVERAGE TRUE RANGE Introduction The Average True Range (ATR) is an indicator that was developed by J. let’s define a few terms that we will be using frequently as we talk about the Average True Range… Average True Range (ATR) is an indicator that measures volatility. so if range increases. Today. entry points.SurefireTradingChallenge. That’s why it remains applicable and popular among good trading systems and is used with a wide variety of instruments. www. An active market is said to be volatile while an inactive market is considered non-volatile. . If the range decreases.

It follows that the True Range (TR) is the maximum range that the price has moved either during the current candle or from the previous close to the highest point reached during the candle. the range begins from the close of the previous candle.com Range is the distance that the price moves per increment of time. It is the distance from the highest price to the lowest price of the day. Previous Close to the Current High C. if the current candle is a Doji where the price does not move at all. if the close of the previous candle is not within the current candle. Also. However.SurefireTradingChallenge. equivalent to the height of 1 bar or candlestick. the real price range is actually the distance from the previous close to the open price of the Dogi (current candle). in other words. Previous Close to the Current Low . True Range is defined as the greatest distance of the following: A. Current High to the Current Low B. It is calculated by taking the difference between the high point and the low point. www.

a shorter average of 10 bars makes the ATR more reactive to the current price range and thus has more fluctuations as compared to a longer average of 20 bars that will show a more stable ATR. www.com Absolute values will be used for the calculations to get the distance between the two points. The number of periods affects how adaptive the ATR is to recent changes in volatility. The first range will be used for the calculation of the initial True Range. This is because the aim is to get the distance and not the direction. the average of the true ranges of a number of periods of data is computed. You will know more about this system as we go along. For instance.SurefireTradingChallenge. According to Wilder. Here is how the ATR looks like when applied on your chart: Calculation/Formula To get the Average True Range (ATR). you must consider the value of the range for a number of periods in order for it to be a useful tool to measure volatility. The ATR is usually based on 14 periods and can be calculated on an intraday. We will use 14 periods as our example for the computation. weekly or monthly basis. A sufficient number of periods must be used to provide sufficient sample size to obtain an accurate indication of an instrument’s price movement. The computation of the initial Average True Range (ATR) differs from the rest of the ATRs. This is why an average of the true range over a number of periods must be obtained. We will talk more about that in another section. . daily. He considers 14 bars to be the best indicator of volatility and uses it for his Volatility system.

02.00131 0.36729 1.35956 1.37126 0.00080 0.35979 1.36135 1.00022 0.00039 0.35713 0.00012 0.00020 0.36691 0.PC CL .00260 8 2011.37124 1.35709 1.00186 29 2011.36979 0.00167 0.36995 1.35453 1.00186 30 2011.00126 0.00109 0.00113 2 2011.18 8:00 1.00073 0.00091 0.00209 25 2011.36944 0.21 2:00 1.00100 0.00367 0.SurefireTradingChallenge.35725 1.35978 0.00700 10 2011.00026 0.00169 0.00257 17 2011.02.36840 1.36830 0.36741 1.36909 0.02.Average True Range Period Date Time Open High Low Close CH .21 0:00 1.00136 0.00078 0.36381 0.00191 0.36749 0.36620 1.00010 0.37020 1.02.36774 0.00039 0.18 7:00 1.36057 1.00166 0.36190 1.00038 0.36987 0.00072 0.21 4:00 1.00260 0.35786 0.00003 0.02.36454 1.00163 0.00191 6 2011.02.Previous Close TR .20 23:00 1.00020 0.00180 0.00389 11 2011.18 15:00 1.36939 1.00039 0.00205 .36681 1.36911 1.00113 0.00140 0.35626 1.00016 0.02.00082 0.00143 0.36840 1.35471 1.35934 1.36727 0.36659 1.21 8:00 1.00362 0.00129 0.00283 0.00000 0.00167 0.35971 1.00117 0.36940 1.36386 1.00087 0.36399 1.00700 0.18 13:00 1.37088 1.36119 0.00283 12 2011.36908 0.18 14:00 1.35606 1.00030 0.00122 0.36856 1.00110 0.00143 5 2011.21 5:00 1.18 22:00 1.02.36826 1.36978 1.00234 21 2011.02.21 9:00 1.36999 1.36367 0.00232 20 2011.36317 1.00110 0.35490 1.00217 24 2011.02.00084 3 2011.00389 0.00129 0.00002 0.00173 0.21 10:00 1.00262 0.02.00109 0.36769 1.00053 0.00010 0.35608 0.36826 1.35789 1.36644 1.00262 0.36139 1.36872 1.00126 0.36734 1.00053 0.02.18 6:00 1.02.02.36813 1.00255 0.00018 0.00226 23 2011.00032 0.00460 0.36970 1.True Range ATR .36362 1.00113 0.36892 1.00168 0.00169 0.36065 0.36864 1.00028 0.21 3:00 1.36029 1.35959 1.36729 1.18 16:00 1.00125 0.00315 0.00166 0.36838 1.00140 9 2011.00129 0.36810 1.35468 1.18 10:00 1.35739 1.PC TR ATR 1 2011.02.36459 1.18 5:00 1.36833 0.02.21 7:00 1.00260 7 2011.35699 1.00397 0.18 17:00 1.37154 1.36818 1.00112 0.18 18:00 1.02.18 9:00 1.00179 0.00161 0.02.35835 1.00020 0.36853 0.00253 16 2011.00019 0.18 20:00 1.36821 1.02.35490 0.36190 1.00242 15 2011.36721 1.00102 0.36990 1.00083 0.37124 1.00084 0.37148 1.36929 1.00196 27 2011.36098 1.00129 0.36164 1.00012 0.Current Low PC .02.36914 1.00013 0.00197 26 2011.36689 1.00248 18 2011.00140 0.36962 1.02.02.00362 14 2011.02.18 19:00 1.36681 1.18 21:00 1.36699 1.00082 0.00083 0.00061 0.00315 0.00061 0.00185 0.00179 0.36700 1.36899 0.36859 1.36985 1.36124 1.36065 1.00188 28 2011.00242 19 2011.35930 0.00168 0.36051 0.Current High CL .21 6:00 1.36093 1.18 11:00 1.02.02.00041 0.00397 0.36731 0.02.00460 0.36065 1.02.00100 0.36810 1.36811 0.36754 1. www.00260 0.36688 1.com Please refer to the following table for our discussion on the computation: Legend: CH .36629 0.00002 0.36319 0.00101 0.00132 0.36730 0.00163 4 2011.02.00129 13 2011.18 12:00 1.02.00027 0.CL CH .00236 22 2011.36870 1.37089 1.21 1:00 1.00180 0.00255 0.36050 1.02.36768 1.00099 0.36254 1.00162 0.36031 1.00099 0.00180 0.

Current Low (CL) TR = Current High (CH) . Initial ATR = TR1 + TR2 + TR3 + TR4 + TR5 + TR6 + TR7 + TR8 + TR9 + TR10 + TR11 + TR12 + TR13 + TR14 14 Example: Initial ATR = TR1 + TR2 + TR3 + TR4 + TR5 + TR6 + TR7 + TR8 + TR9 + TR10 + TR11 + TR12 + TR13 + TR14 14 = 0.35699 = $0.CL = 1. The first 14-day ATR is the average of the daily TR values for the last 14 days.00260 TR9 = CH .00143 + 0.Current Low Example: TR1 = CH .36381 = $0. TR for day 1 = Current High .Previous Close (PC) Examples: TR6 = CH .00084 + 0.SurefireTradingChallenge.36164 .Previous Close (PC) TR = Current Low (CL) .00163 + 0.00260 + 0.36190 .1.1.00700 + 0.00283 We use the absolute values because as mentioned earlier.00283 + 0.com Step 1: Compute for True Range value for 14 days.00113 TR for days 2 to 14 will have the greatest value among the following: TR = Current High (CH) .36050 = $0. The first True Range (TR) value is obtained from only 1 period and it is calculated by deducting its Current Low to the Current High.00242 .PC = 1.CL = 1. the aim of this computation is to obtain the distance regardless of the direction.PC = 1.00140 + 0.35959 . www.00129 + 0.00389 + 0. Step 2: Compute for the Initial Average True Range value.1.00113 + 0.00700 TR11 = CL .35490 = $0.36098 .00191 + 0.00168 14 = $0. The rest of the TRs will have a value that is the greatest among the 3 computations as defined.1.00362 + 0.00260 + 0.

it plays a vital role in setting your stops or take profit levels. the huge difference between the volatility levels would require us to set 2 different stop loss levels. www. Useful Across Different Financial Securities A system that can only be used to trade in one market can be used to trade other markets just by changing the way the calculations are expressed. our stops may be $0. then add the current TR and divide by 14.00253 Advantages There are 2 main reasons that made the Average True Rage (ATR) remain popularly used with many trading systems through the decades. Imagine that we are using a simple system to trade with 2 different instruments. Using units or multiples of ATR instead of using definitive values such as dollars. Given that A’s ATR is $0.0020) and B’s stop loss level would also be at $450 (computed from 1. a currency pair (A) and a commodity (B). For instance. points or pips can turn any simple system into a universal trading system. To compute for the ATR for the rest of the days. .5 x $0.0030 (computed from 1.0020 and B’s ATR is $300.5 x $300).0030 for A and $450 for B. we will need only 1 value to compute the stop loss level for both markets. if we use values in units or multiples of ATR to set our stop loss for our system.com Step 3: Compute for the Average True Range value for the rest of the days. Multiply the previous ATR by 13.00242x 13) + 0. A’s stop loss level would still be $0. only the information on the previous ATR is held. We can set our stop 1.00397 14 = $0. Below is a typical scenario of how the ATR can be applied to set your stop for different financial instruments. The ATR is a remarkable measure of market price movement because it can be used across different financial securities and it also adapts to changing market volatility. Current ATR = (Previous ATR x 13) + Current TR 14 Example: Current ATR = (Previous ATR x 13) + Current TR 14 = (0.SurefireTradingChallenge. On the other hand. One of the most common uses of the ATR is setting the stop loss level. Because of this.5 ATRs from the entry price.

pip or whatever units of measure used in your system can make it remain applicable in the long run without reoptimization despite any changes in price movement or volatility. but also in the future despite any changes in market volatility. Most systems that use the ATR are applicable not only in the past and the present. Similarly.5 x $0. if we substitute units of ATR to the amounts we were originally using as our stop. causing you to lose an unnecessarily large amount from every single trade. Notice that the stop loss level is adjusted automatically even if we are still using the same stop loss value which is 1. So. our new stop for A would be $0. We need to reoptimize our system to suit the current market conditions. We are well aware that market conditions and. if the market becomes extremely volatile and ATR changes to 40 pips.com Adaptive To Changing Market Conditions Substituting units or multiples of ATR to the usual dollar. That is the essence of using the ATR in any trading system. you will not be stopped out. our system would greatly improve.5 x 40). point.0010) and our stop for B would be $225 (computed from 1. our stops would automatically adjust to accommodate the change.0030 stop for A and $450 for B are now too close. if the market quiets down and the ATR of A changes to $0. Similarly. When volatility changes. Since the ATR changes in direct proportion to changes in volatility. Here’s a typical scenario to prove this point… If the market quiets down and the ATR of A changes to $0. Unless the market has changed in direction. can change and will change either abruptly or gradually. the $0. . www. the $0. it can easily bring your stop closer or farther to allow enough space for price movement normally expected for that particular volatility level.0010 and B changes to $150.5 x $150). our stop would now be at 60 pips (1.5 ATR. Our improved system is still applicable and there is no need for reoptimization. On the other hand. price movement or volatility. it significantly cuts off a big chunk of hard work when looking into different markets and its accompanying fluctuations in volatility. Because it can adapt to change and can be used with different markets without altering its value.SurefireTradingChallenge.0030 stop for A and $450 stop for B are now too far.0040 and B increases to $600.0010 and B changes to $150. consequently. causing you a higher percentage of losing trades. if the market becomes extremely volatile and the ATR of A increases to $0.0015 (computed from 1.

you will see that an uptrend has formed and every time the ATR reaches its lowest levels. In the rest of the sections. 2. which is eventually be followed by price reversal. Price has reached the bottom or top. Depending on its readings. we need to know what the values of the ATR mean. the ATR can be used in all aspects of the trading process. you can see that the ATR is generally low and has now peaks. The market is ranging when the ATR is relatively low. There isn’t enough volatility to move the market in an uptrend or a downtrend. This may mean any of the following: 1. Low ATR Reading A low reading of ATR simply indicates that the market is quiet and less volatile. a change in price direction follows.com Interpreting the ATR Now that we know what the Average True Rage (ATR) is and how it is computed. . Have a look at the image below.SurefireTradingChallenge. In the first section of the image above. The volume of the market is light. Notice that the market is just ranging at that time. www.

Take a look at the image with the peaks marked below. 2. when the market makes a strong move in one direction that is stronger than the normal fluctuations above. the ATR increases when the market is moving up or down and it usually peaks when a sustained movement has occurred. The ATR peaks when any of the following situations occur: 1. an increased ATR simply indicates that the market is very active and is highly volatile. This would indicate that a much stable trend is imminent because there is sufficient movement in the market for the price to move in an uptrend or a downtrend. During a rally or a period of sustained increase in price. As you can see.SurefireTradingChallenge.com High ATR Reading On the other hand. . www. However. it is assumed that a new trend is now forming (breakout). During a sustained period of decline in price.

When the market is trending. a change in price direction usually follows. a 50 period moving average (MA) is used to identify the general trend. For example. High ATR Reading The market usually becomes very volatile when a new trend is now forming. The price is now returning to the general trend. Entry Low ATR Reading When the ATR reaches its lowest levels. Inversely. we will buy once a retracement has ended and the price continues going up in the uptrend. ATR Cycle In the previous images. you will only sell if the price reaches 3 ATRs lower than the previous close. You will know when the dip has ended when a new candle opens and reaches 1 ATR above the previous low. Supposing that the price normally rises or falls 2 ATRs from the previous close. we’ll find out how it these concepts can be used with logic in the various aspects of our trading – Entry. the current close should be 2 ATRs or more below the close 5 days ago. exceeding that level indicates that an unusual phenomenon occurred. a breakout is happening and thus the beginning of a new trend.SurefireTradingChallenge. enter only after the price has retraced and is returning to the general trend. and this is when you enter the buy trade. Take Profit. you will notice that a low ATR reading is always followed by a high reading. The opposite of the above conditions will be the rules for entering a sell trade. Inversely. Here’s an example. Knowing when the market is quiet is important because it means that the volatility will increase soon indicating a possible trade setup. and we can use the ATR values to confirm it. we will only sell once a retracement in a downtrend has ended and the price continues going down. you will only buy if the price reaches 3 ATRs higher from the previous close.com Uses Now that we know what the readings of the Average True Range Mean. www. Here. Stop Loss. The ATR is cyclical in nature. we can begin with a period of low volatility and wait for an increase in volatility before looking to enter the trade. Here’s how we can use this information to our advantage. If we want to refine our signals. To ensure that we are in a retracement (dip). The current close must be 2 ATRs or more than the 50 MA to ensure that the general trend is up. This is called a breakout. Since the price normally only reaches up to a number of ATRs only. . increasing and decreasing alternately.

Because of this. The exit rules for systems using the Chandelier Exit may let you stop your loss when the price reaches the highest high of the trade minus 3 ATRs (computed as Highest High .3ATR) or when the price reaches the highest close reached during the trade minus 3 ATRs (computed as Highest Close . We know that even backtests indicate that a certain value such as 40 pips is the best take profit level. the stop loss level is expressed in ATRs so it also adjusts to the changing market conditions.3ATR). it also plays a significant role in setting the take profit level. On the other hand. But again. Here. market conditions are ever changing and degree of volatility will always change. . and you will sell only after a sustained period of increase in price. Take Profit The Average true range is not only used as a basis for the stop loss level.com Note however. You will either sell or buy depending on the direction of the trend. Depending on the system. it will only hold true for the time being and may need reoptimization as the market condition changes. One great example would be Chuck LeBeau’s famous Chandelier Exit. www.SurefireTradingChallenge. It only goes up for a buy trade or down for a sell trade. Stop Loss The Average True Range plays an important role in selecting the stop loss level in a trade. If the markets are unusually quiet. however. The stop loss level will be set an N number ATRs from the highest high/close for a buy trade or from the lowest low/close is reached for a sell trade. Our discussion on the use of dollars to express the value of the stop loss level goes the same way if we express it as number of periods or pips. This can be achieved when we express our profit target in terms of ATRs. that the ATR only indicates the volatility and not the direction. traders wait for it to reach a number of ATRs in the new direction before entering the trade. we need a profit target that can adapt to changes in volatility. To have a more stable system. Note. Let’s apply the same principle in setting the take profit. if the market is extremely volatile. It can also be used to trail your stops. The Chandelier Exit is so called because it hangs downward from the ceiling of the market. we may not reach our 40-pip take profit level. As soon as the price reversed. Here. Some trading systems only place trades after the price has reached the extreme peak or extreme bottom and has reversed. the values of the number of ATRs and periods vary. that the movement of the Chandelier Exit is only in one direction. you can only take 40 pips even if you could have taken much more than 40 pips. you will buy only after the market has reached a significant decline in price. 40 pips is not an ideal measure of our profit target.

System 2 will still be applicable but not System 1. 2. 4 ATRs may be equal to 80 pips. Let me show you what I mean. when the market becomes extremely volatile. If the current ATR is 10 pips. This time. Just like our example earlier. the value of our 4 ATR increases to 80 pips. even if you will have the same percentage of winning trades.SurefireTradingChallenge. Stop Loss 15 pips 1. Setting appropriate stop loss and take profit levels are important aspects of money management that no trader should miss out. www. Unfortunately. the market is ever changing and volatility fluctuates. Buy when price exceeds 1 ATR. your winners will be bigger than usual because your target profit has increased along with the increase in volatility. RULES System 1 (pips) System 2 (ATRs) 1. Given that our backtests indicate that the best profit target is 4 ATRs.5 ATR The systems above look similar. when the market becomes very volatile. Have a look at the System 1 and System 2 below. Take Profit 40 pips 4 ATR 3. when the market is extremely quiet. . Let’s compare 2 systems with similar rules but with different units of measure. Both systems are equally effective if only market conditions remain the same... We will get out with 40 more pips as compared to our usual take profit level during normal market conditions. When that happens. When using the ATR based profit target and the market tends to be extremely volatile. There is no need for reoptimization because the ATR based profit target readily adapts to the changes market conditions. it is equivalent to 40 pips in normal market conditions. it may only be equivalent to 20 pips. Entry Buy when price exceeds 10 pips. you will be entered and exited with the same prices. On the other hand. Example Let me show you the difference that the ATR can make when used in a trading system.com Here’s an example.

With System 1. The same holds true with the take profit level. You will be in and out of trades with losses that you are not supposed to get. . System 1 will now take you out of your trades prematurely. On the other hand. the entry for System 1 remains the same.com Assuming that the market becomes extremely volatile that the current ATR becomes 20 pips. System 2 will give you only the entries that count since its entry has been increased because of the increased volatility. As volatility increased. Because System 2 adapts to the changes in market conditions. Using System 2 will allow you to get bigger profits because the take profit level increases with the increase in volatility. Stop Loss 15 pips 1. and you will only get 40 pips per trade even if you could have earned 80 pips. our winning trades become bigger as a result of the increased take profit levels due to the increase in volatility. Entry 10 pips 1 ATR = 10 pips 10 pips 1 ATR = 20 pips 2. we will achieve a stable win/loss ratio. For the stop loss.5 ATR = 15 pips 15 pips 1.SurefireTradingChallenge. In addition. the previous ATR which is 10 pips has been doubled. Have a look at the table below to have a better grasp of the scenario. www. you will be entered unreasonably in too many trades. This goes to show that System 2 is a significant improvement of System 1. the stop loss is increased accordingly to give the price enough space to retrace and go back to its original direction. you will be taken out with your profit too early. Take Profit 40 pips 4 ATR = 40 pips 40 pips 4 ATR = 80 pips 3. In contrast. Previous ATR = 10 pips Current ATR = 20 pips RULES System 1 System 2 System 1 System 2 1. the stop loss level for System 2 is much farther. With the increase in volatility.5 ATR = 30 pips As you can see.

SurefireTradingChallenge. I use the 4 Hour and 1 Hour timeframes to confirm the general trend of the market. www. Let me show you how I use the ATR to filter my entries.001 level) 8 Period Simple Moving Average (8 Period SMA) 21 Period Simple Moving Average (21 Period SMA) . stop loss and exit/take profit levels for a simple system with 2 SMAs. I also use it to enter my trades. Indicators: 14 Period Average True Range (0. Currency Pair: EUR/USD Timeframes: I use the 15 Minute timeframe to check for the ATR reading before finding trade setups. Here is my RTA-Filtered SMA System.com Application: ATR-Filtered SMA System Now you’ve seen how the proper use of the Average True Range can greatly improve a simple trading system.

. Exit at the open of the next candle when both conditions are met: a. have a look at some examples in the next page. so only when the price reaches 3 ATRs from the highest close will I take my profit and close my trade. I use 3 ATRs because this is the recommended multiplier by Wilder. This indicates that the market is quiet. 4. b. I can confirm that the downtrend has reversed to an uptrend if the price moves more than 3 ATRs from the lowest close. H1 and M15. there is a bigger probability that the market has completely turned against me. 5. I use the ATR reading to confirm this. If the price moves against my favor and reaches 3 ATRs below the entry price. To get a better idea. I will only enter a buy trade only when the trend is up. 3. Price crosses 3ATRs from the highest close. 6.com Rules: Below are the Buy Trade Rules for my system. As soon as Point 2 and Point 3 have been met. enter a buy trade. I do this to ensure that I am in the appropriate trend. 2. Identify the most recent lowest low/swing low then add 3 ATRs to the closing price of that candle (Closing Price + 3ATR). it may indicate that the price is now retracing or reversing. www.001 level to serve as a visual signal that the ATR has reached a low level in the EUR/USD chart. Wait for the price to be above the 8 SMA and the 8 SMA to cross above the 21 SMA in the H4. the 14 ATR must be 0. The exact opposite will hold true for Sell trade rules and will not be discussed. Wait for the price to close above this level. Here. 1. On the M15 chart. I would rather cut my losses short before it gets out of hand.SurefireTradingChallenge. The 8 SMA crosses under the 21 SMA.0010 or less before looking for signals. and a possible breakout is about to occur. Set the stop loss 3 ATRs below the entry price. When the 8 SMA crosses under the 21 SMA. I just use the 0.

31320 ATR = 0.com Examples Buy Trade Example 1: In the image above.30899 indicated by the blue horizontal line.001 level. www.30899 ATR = 0.31199 I entered a buy trade at the open of the candle indicated by the solid green line then set my stop loss level 3 ATRs below it.0010 .30899 = 1. and the ATR level then was at 0.0010) + 1. and the 8 SMA completely crossed in the H4 and H1 at the close of the candle along the dotted green vertical line. Buy Entry Price (open of next candle) = 1.0010 3ATR + Recent Lowest Close = 3 (0.SurefireTradingChallenge. The most recent lowest low was at 1. Recent Lowest Close = 1. The price was above the SMAs. you can see that I started looking for the trade setup along the blue vertical line where the ATR is below 0. so I computed 3 ATRs from there so that I can enter a buy trade when the price exceeds that level.0010.

SurefireTradingChallenge.0.31320 .33783 .31020 = Entry Price .3 (ATR) = 1.00300 = 1.33363 Exit/Take Profit = 1.0042 = 1. www.3 (ATR) = 1.3 (0.001. Recent Highest Close = 1.0014 Highest Close .33783 ATR = 0.33417 Buy Trade Example 2: In this example. I just repeated the process of checking for signals when the ATR went below 0.31020 Later on. I noticed that the 8 SMA began to cross under the 21 SMA.31320 . so I computed 3 ATRs from the highest close to confirm that the trend was now reversing and exited the trade as soon as the price reached that level.3 (0.com Stop Loss = 1.0014) = 1.33783 .0010) = 1. I then waited for the price to be above the SMAs and that 8 SMA would be above 21 .0.

31320 .33410 ATR = 0.0010 3ATR + Recent Lowest Close = 3 (0.0. I computed for 3 ATRs from the close of the highest candle and exited the position when the price reached that level.0010) + 1.34477 ATR = 0.3 (0.0039 = 1.com SMA. Highest Close = 1.34477 .33068 ATR = 0.33068 = 1. I entered the trade as soon as the price exceeded 3 ATRs from the close of the previous swing low.3 (0.SurefireTradingChallenge.0.3 (ATR) = 1.3 (ATR) = 1.0013 Stop Loss = Entry Price .34477 . Recent Lowest Close = 1.0078 = 1.33697 Exit/Take Profit = 1.0026) = 1.33368 I then set my stop loss level 3 ATRs below the entry price. www.31320 .33020 When the price retraced and the SMAs crossed.0026 Highest Close .33720 .0013) = 1. Buy Entry Price (open of next candle) = 1.

A highly volatile market is typically followed by a quiet market and because the ATR identifies when the volatility increases. you can tighten your stop by reducing the distance between your high/low (for a buy/sell) and the stop to 1. Supposing that your trailing stop is originally set at 2 ATRs from the high. points. Conclusion Indeed. but do this only when volatility is increasing and the trade is going against our favor. you can also reduce the distance from the price to your trailing stop once you are already in a stable profit. This can be used when volatility increases and the trade is in our favor. As such.com Video Watch this video to see how I use the Average True Range (ATR) to my advantage in my simple trading system. profit targets and stops. Aside from those mentioned.SurefireTradingChallenge.5 ATRs. it can help confirm the breakout of a new trend. it is still a vital tool in identifying logical entries. and your profit is steadily increasing. Although the ATR cannot tell the direction of the market. . the Average True Range (ATR) is a brilliant volatility indicator. CLICK HERE TO WATCH THE VIDEO Comments/Notes The use of the Average True Range in expressing the stop loss levels may expose a particular position to greater risks when the volatility greatly increases. It identifies the strength of the price movement or volatility. www. To maximize the profits taken per trade. It is then advisable to have a set stop for emergency situations expressed in dollars. or pips. We can also reduce the lot size to reduce the risk exposure. it may exceed the maximum risk set by our money management. the ATR can be used as in conjunction with other indicators or as part of a trading system to help filter trade signals.

The ATR can be used in many different ways to help make your system remain applicable despite changing market conditions.com Join Us At Surefire Trading Challenge You Never Need To Buy Or Pay For Anything To Be Part Of Our Community The Largest Independent Forex Trading Competition In The World www. www. It also makes your system suitable for different financial instruments.com . I hope that with this report. I was able to show you the significance of the Average True Range in trading when used properly.surefiretradingchallenge. this unique indicator managed to not only survive but remain popularly used in many trading systems simply because of these reasons.SurefireTradingChallenge.surefiretradingchallenge.com Over the decades. By: Marcille Grapa www. I suggest you try it out and tweak some settings to see what suits best for your trading style.