How To Use The Average True Range Indicator When Day Trading Forex

The ATR (Average True Range) indicator is a very useful technical indicator for anyone who trades the forex markets on a short-term basis

. It is essentially a measure of volatility but it also tells you the average trading range for any given period. So why is this useful?

Well if you're a forex day trader you need to know how far the markets are likely to move in your favour (once you've conducted technical analysis and come to a conclusion as to which way the markets are likely to move). The ATR indicator helps with this task.

If, for example, you are trading the GBP/USD pair and this pair has so far traded in a narrow range of 40 points in the first 7 hours of trading up until 07.00 (UK time), then you can look at the ATR indicator to see how much further the price could potentially move if it breaks out of this trading range. By opening up a daily chart and applying the ATR indicator you can instantly see the average daily trading range by looking at the latest ATR figure.

For instance the latest figure I have for the GBP/USD pair is 114 points. This is actually on the low side because the markets have been very quiet lately (it has been as high as 200 points earlier in the year). However if you were trading this pair in the example above, you would still be confident that you could generate some decent pips trading any breakouts that may occur because the trading range is only 40 points so far.

To give you another scenario, if you woke up one morning and saw that the price of the GBP/USD pair had fluctuated wildly overnight, and was trading in a range of 150 or 200 pips, then you would probably be better off leaving this pair alone because it may just trade sideways for the rest of the day. It may be a better idea to look for other currency pairs that are trading in a trading range well below their current ATR.

So the point I want to get across is that the ATR indicator is one that you should be fully aware of if you are day trading the currency markets. You need to know how far the price is likely to move in your favour if it makes new highs or lows, and the ATR indicator is ideal for working this out.

Breakout trading is one of the most popular ways to trade the markets, and it's even more profitable when the current trading range for the day so far is well below the latest ATR figure. So you should always pay close attention to this indicator.

How To Use The Average True Range Indicator When Day Trading Forex

By: James Woolley

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