Tuesday, January 21st, 2014 by Tim Lanoue
The search for the “Holy Grail” strategy is still underway and will more than likely never be found which is why we as traders need to become dynamic and have a wide arsenal of trading strategies to implement for when times get tough. Moving forward the focus of today’s article is to discuss the ATR (average true range) indicator and how to properly implement it into a trading strategy.
The Average True Range indicator is a relatively unique indicator because part of its function is to measure an assets volatility by measuring the absolute value of the previous opening and close. First introduced by Welles Wilder, the ATR indicator serves the primary purpose of displaying an assets average movement throughout a day compared to the previous fourteen days.
Setting Up the ATR Indicator
Proper setup is essential if you plan to use the ATR indicator in a trading strategy. The first step we need to take is to make sure we have a reliable trading asset like the Eur/Usd, Usd/Chf, Exxon, Apple, Gold, Oil or Silver. Secondly, we need to make sure we are only looking at daily charts for our selected asset. If you are unsure where you can find a charting solution you can always use Freestockcharts.com, they offer a free charting solution with indicator settings already preset.
Average True Range Strategy
Applying this indicator into a trading strategy is easy to do once we have the proper setup. In the picture below you can see we have the Eur/Usd asset set on the daily time frame with our ATR indicator at the bottom. Customization of the ATR indicator can be made to change the time frame but it comes preset at 14 days, which is what the strategy calls for. As you can see in the picture we have 5 pairs of peach colored boxes correlating vertically to each other. In addition, you can see how each paired box correlates in direction to one another, this is the focal point of our trading signal. When we have a correlating movement between our assets trend and the ATR line this is considered a signal for us to place a trade in the direction of our trend. So if we see an upward movement with our assets trend and the ATR line we place a call trade and vice versa for a bearish trend. Expiry times for these signals should be no less than one hour and no more than one day so keep that in mind when placing your trade.
The ATR indicator is simple to implement into almost any trading strategy and works great alone. Perhaps one of the greatest benefits to only needing this sole indicator for a day trading strategy would be that it allows new online traders the ability to focus more on accurate signals than having to focus on a number of indicators and missing good signals. Setting up this indicator and applying the strategic aspect is easy to do and can be performed by dynamic traders consisting of any experience level.