Hi all traders. If you click to Dukascopy community and "Forex article contest" you can see picture of William Shakespeare. He wrote many works and in one of them famous sentense: "To be, or not to be..." It is the opening phrase of a dialog in the "Nunnery Scene" of William Shakespeare's play Hamlet. This question is very analogous to traders every day question: "buy or sell"?

Is it easy answer? Of course not because trading is hard business. What can help? There is indicator Average true range in shortly ATR. What is ATR? ATR is a technical analysis volatility indicator originally developed by Welles Wilder. The indicator does not provide an indication of price trend, simply the degree of price volatility. The average true range is an N-day moving average of the true range values.

How can we use it for trading? Do not forget the main question for intraday trader is "buy or sell?" in actual day. Setup chart will not by daily time frame but lower time frame for example one hour. But intraday trader need daily time frame for answer his question. Why? Because daily time frame is setup chart for ATR indicator. This is very important information for intraday trader. Please look next example for understanding. Chart is GBP/USD daily time frame:

We can see 2 ATR indicators. One of them is with 14 value and second is with 1 value. ATR 14 is average true range an 14-day moving average of the true range values. It is very important because from this pictures we can see how many pips is made in GBP/USD in average per day. ATR 1 can say to us how many pips is GBP/USD made in today.

At this example ATR 14 is with 118 pips and ATR 1 is with 47 pips:

What we can do with it? It is very easy:

118 pips - 47 pips = 71 pips

Yes we have free 71 pips for trade in average of this currency pair. It is very simple help for intraday trader.

Condition for ATR rules:
if ATR 1 < ATR 14 it is OK
if ATR 1 > ATR 14 it is not OK

In % formula is:
if ATR 1 < 50% of ATR 14 it is OK
if ATR 1 > 50% of ATR 14 it is not OK

Examples of ATR use:

Why 50%? Because we need area for take profit. Of course somebody can change 50% to other value of %. In 3 pictures above only EUR/USD is correct with condition for ATR rule.

This article was about ATR in intraday trading. If we can find "OK" condition in charts we need to find corect price action in lower time frame for us trade.

Thank you for your time and I wish you many successful trades.
Translate to English Show original