Introduction Legal {ant to thank you vey much and congratulate you for downloading the book, Average True Range—Your Step-by-Step Guide ©Copyright 2014 Zant, LL. Al igh's ‘Profitable Forex Trading with Averege True Ceeeat Range. Allsghts refered. This book contains on material protected under US. copyright avs. Ssinmntbivursinuahonytaasansplir Any unauthorized reprint or use ofthis ‘most comnion indleators used by forex traders tomeasure volatility ‘materials prohibited. No par of this book may ‘be eprodved of transmitted in an-form or by Inthidook jut ewa ATR iad nye clei ome ating howttvrtsYaltlacnstepayaepbets pcp anor soa ‘sewtogmerteundag uh pacers Saget ee te wit ees cic tpt Any staken rien eran for an rouse rea-vnitamee ase son ain vce nk] Tang nay faa martes substantial ek of lose ands not stable for all investors. Any syle of trading in any market condition is extremely risky andean result in -ubstatial financial losses ina very short capital andor asets. 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This may seer like a very obvious statement, bat it has important consequences when selecting which financial instruments to trade and wen. For instance, if there is tle oF no movement ina enreney a there are ver) few prot oppertanites. Because of this, it Is important to look at the volatility of a curency pai. This 16 not whether the prie is rising or fling, but how large the range is that i trading in. For ‘example, a curreney pai hat is ranging over 40 pips in a day doesn't offer the same ‘opportunities ab one that i ranging over 200, Average True Range (ATR) i one of the Chapter 2 — A Closer Look at ATR most common indicators that traders use to tease voatiy. The indicator was invented by J Welles Wilder, who also created other ATR does not measure price tends, but ‘widely used indicators such as the Parabolic instead measures the exponential moving SAR the Relative Strength Indes (RSI) and the average of something called the tre range of Average Directional Index (ADX). While the the price, In other words it looks at how ATR is sometimes used to generate trading raging ranges vary era period of time on a signals by itself, itis more commonly used to aly basi, with the most common exponential determine stop placement and identify prot Smoothing period belng 14 days ~ this ATR potential 24. However, sometimes other smoothing petiods are used to produce other ATR valves — uch a8 ATR 100, Thece slower ATR values are severally used to. generate signals when combined with ATR 14 ‘Tue range is somewhat diferent fom the daily troding range. A dally tafing range is ple difference between the high and low ‘values of the day, but the true range aso takesinto eccount the provious day's closing price. for when the market gaps higher or lower This allows price movements that bappen between sessions, This is best iustrated with ‘ewe trading sesions to be induded. of somesimpie examples. cours, this more important in some other markets, where exchanges are only open for fixed times duving the day, bat i does also apply inthe 24-hour forex market, pateuarly ‘over the weekends when the matket loss ‘True range is determined by taking the largest the fliowing ree values + Thebigh minus ow ofthe most recent trading petid = this is simply ‘the daly ange + Theabsolute value of the most recent high mins the previous cose +The absolute value of the most ‘recent low minus the previous lose. ‘The second and thie valves compensate Example #1 Example #2 ‘The market closes at 1411 Inthe previous “The market closest 1.384 ithe previous session, and then tiadas between 1gp2 and session, and then trades between 1.992 and 1417. In this ease, the fst value ~ the daly 1.4174 in Example #1. In this ease the mazket range ~ is 0.025, The previous diy’ close ies has gapped up between sessions. Theft wale vsithin the trading range — 1434 is between i fill 0.025, but the second valao i 0.095, s0zand 1417 Therefore, the second and thied This isthe largest of three values and becomes values are both smaller ~ they are 0.006 and the te range. In effet, the previous day's ‘oo respectively. In thisease,thetrue ranges lose Ls being teated as if it isthe low of the simply the daly range, whichis 0.025 (et 25 euent session. The hind value s 0.08, bt this is ‘sirvelevant.taking the EMA of the true range over Example #3 at ‘The market closes at 1.426 inthe previous 1 important to note that ATR snot ted session, and azn trades Detween 1.392 and tothe atl rie ofthe instrument. Since it ls 1.17. In this case, the market has gapped owen. jase on the eiference between the high and Again, the fist value 6 01025, but the thin joy, only shows bow much the Instrument is ‘lus 0.034. 0.034 s the largest ofthe thiee ranging not the actual pie level, This means values and becomes the true range. This is that itis posible to compare ranges across equivalent to using the previous close as the ifferent.earreney. pairs, but this is not high ofthe session. The second value (0.000) is gquivalent to eombrng, real volts. For inrelevant inthis ase fnstance, on July 9, 2014, the ATR 14 of USD/SPY was 0.0599, while the ATR 14 of ‘As can be seen from the examples above, _EURY/USD was 0.0010, Despite this, USD/EUR theeffectof tue range stoestendtherangeof ATR 14 sndicated high volatility, while the the trading peviod to include the previous USD/JPY ATR 44 indicated Ise volatility losing price, Intuitively, this makes sense, since i takes into ansount price movements ‘There are a numberof diffrent ways to that oar between trading periods use ATR, whieh we wil examine inthe following sections. ‘The ATR is hen caleuated simply by eal eae eet ee meme mee Determining Position Size some multiple of i depending on your sk pf, then you wil take into account the Before we lookat how ATR can be usedto current market volatility and hopefilly avoid senerate trading signals, e's Took at how can eing stopped. out t00 ent or taking Delp to manage isk in a wide range of tading yard iss. seonation Once you have set sour stopdoss distance, ‘When opening any poston, its important then becomes relatively simple to cleulte to take into acount sonal voatiity in the the positon sie that sou should take, For market Bien if sou comet pretet the instance, if you bave 810000 in your trading subsequent price movement, placing stops to genni, cs no a god idea fo risk more than lose can cause you to exit before you have the von any trade The means tty total ick ‘pportnitytoolet your profis.On the other gy any ane trade should not be more than ‘nd placing stops oo faraway inerests your 300, Kaomag where your stop i postions, ris for no god reason. Tn general, you should soy ean en elelate the position sie that ‘lace sour stops further away in markets that alge youa tata sk $900, se volatile and place them closer ia markets that ten. ‘The nice thing about this approach ie thatitallows you to take lager positions when the market is less volatile and smaller postions vinen iis This means that you maximize your ‘profit potential while maintaining 2 constant isk level. For instane, you might be tempted to place & stop go pips avay in a particular luade. However, if the ATR tells you that 20 ips is appropriate for the current market vwlatity, then you can take twice as large a position Chapter 4 Estimating Profit Potential you ate trading oer short intervals ~ day ‘wading — then ATR can give you a good ‘measure of the prfit potenti in any given ‘market, For example, you might see a EUR/USD trade setup that has a good risk/reward ratio if you can generate 100 pips fof prot However, ifthe ATR 1 ssiting at 30 ib, Seeing 100 pips of movement in 3 day i= ighly ule. OF course Ifyou ave trading ver longer Intervals yo coal definitely ee movement ‘of 0 pips or ore even ifthe ATR is a 90 pis However, even ifyou are sing trading ‘over divs or weeks, ATR can sl be use Ia general there are more profits oe made in ‘volte mavkets, so ATR ean be used a good filter to look for currency pairs with good ‘volt. Remember, however that ATR not an absolute measure of volatility ~you need to Tookcat iin the context ofthe price of ofthe currency pai.One way to generate this signal is by eee te i esse reat Shanker 5 Using ATR by self to Sh eta at en ate eeepme tng instal soba moe tence Stuy vor ily teow the AT, tai bs Dee si tone Aycan he he any wd steel de Sowihe anmene ‘One pattern that epeats again and again in ‘the forex market is that periods of lo volatilty a often followed by strong price moves in a particular direction. 1f you can soe when ‘laity has become abnormal iow any rend that stats to develop at this point may be a gh pereentage trading opportunity, ‘oF course, thete are other indeators vehi wll provide similar signal, For instance this is ‘why contacting Bollinger bands are often used to predict breakouts. However, noma vlatiity levels vay from pale to pal, sot 1s important to see how olay is. changing, not just the actual laity level. For instance, som might eit nti] you see low volatility for the cureney pai. Then, when you see the voltity to start to increase, place trade in the istion of any pace move Chapter 6 ~ Tips And Warnings ‘There are a couple of things to keepin ‘mind when using ATR. Fst, ATR isnot an absolute measure of voatlity. It needs to be used in conjunction ‘with the price ofthe instrament to determine how much velatility ther is. ATR canbe used by itself to set stops independent ofthe price, but prot potential isa function of by ATR and absolute pie ‘Second, you are using ATR to postion stops, you wil set your inital stop position ‘ced om the current ATR value However, ATR ‘values wll obvious ehange overtime, whieh leads tothe question of whether or net you(Chapter 7 ~ Final Notes adjusting your stopsalso adjusts your level of ‘sk For example, f ATR increases by 0% and ‘you move your stops out by 50% according, ‘then you have increased your risk by 50%as| ‘well One way of maintaining your risk evel is to reduce you position size correspondingly. ATR is a widely used indicator and is relatively simple to understand. ¢ provides a good measure of volatility, whieh 1S useful ‘when placing tops since allows you t adjust your stop placement to take into account the ‘current matket conditions. ATR i alo uel to determine the size of. postions you shoul take. Tiss inked to stop placement, sine esk is fanetion ofboth stops and size. Keep in mind that you should set limits on the amount of you total capital that you ae willing to risk on anyone trade — mst traders are wiling to risk 1 to 9% Never set rourstops too close so thatyou can take a large Postion sig, since you wil just be stopped out to early. Instead, take a postion size that reflets both your risk profile and the level of Cgnietusion, ‘voltity i the market Finally, ATR an be used asa trading signal ‘Thankyou again for downlonding this boot to take advantage of volatty. By loking for ‘You should ow have the knowlege you periods of low laity followed by nad totrade for using Average True Range. Strengthening trends and inereasing volatility, you ean exploit the breakouts that often occur ‘Thonext step ota ation! ‘under these conditions, However, keepin mind Finally ifyou enjoyed this book please ‘that ATE well not identify the trend itself to take the time to share our thoughts end post do this, you need to confirm the tend dreely _reiewon Amazon. Ite great appreciated! ‘ortae other indicators to predict it areas reap Bonus: Download the Free ‘Trading Toolkit Get instant access to free cheatsheets, ‘workbooks and guides to help you become a profitable trader or investor.