Like the Bollinger Bands and ADX, the Average True Range is an indicator used to measure price volatility, but unlike these two indicators, due to the addition of gaps and other factors in its calculation process, So it can more truly reflect the price fluctuations, and because of this, it is called the “true” fluctuation range.

ATR calculation method

ATR measures the price fluctuations in the past period of time and then takes the average value as the result. The fluctuation range here is based on the largest of the following three: 1. The distance between the highest point and the lowest point of day 2. The distance between the closing price of the previous day and the highest price of day 3. The closing price of the previous day and the current day The distance between the lowest prices After understanding the above situation, we will find that when the price has a gap, the real fluctuation range and the fluctuation range of a single K-line are different. In order to better reflect the price fluctuations in the past period of time, we recommend choosing a longer time period, such as 20 or 50.

Usage 1: Set Stop Loss/Take Profit

Many investors have encountered this problem: After entering the market, they set the stop loss and take profit, and finally found that the price just started and the stop loss soon went all the way to the stop profit area. . This situation is an underestimation of price volatility. When the price volatility is greater, our stop loss and take profit should be enlarged accordingly. In order to prevent this from happening, we can use ATR as a reference to stop loss and take profit. For example, we can set the stop loss to 1 time or 0.5 times ATR below a certain price point. In the figure below, assuming that we were long GBPUSD at 1.2977 before, then we can subtract 0.5 times ATR as a stop loss from the small previous low of 1.2865, which is 1.28650-(0.5*0.0072)=1.2829.

Figure 1 as of May 07, 2019on OANDA MT4
Figure 1 as of May 07, 2019on OANDA MT4

Another method for ATR to make a stop loss on the OANDA MT4 platform is based on the closing price of the previous trading day. Assuming that we are long at the current price of 1.30598, when the price falls below 1 time the ATR of the closing price of the previous trading day, that is, 1.30598-0.00720=1.29878, we can consider stopping loss. As the price gradually develops in a direction that is beneficial to us, we need to continuously increase our stop loss position to prevent floating profits from becoming floating losses. Suppose we are long GBPUSD at the current position of 1.30598, with a stop loss of 1.29878, then when the price rises to 1.30598, we can increase the stop loss to 1.29878. The introduction of ATR has brought us a new adjustment stop loss method: the ratchet stop loss method. The so-called ratchet stop loss method means that when the price develops in a direction that is beneficial to us, we must constantly adjust the stop loss. The specific method is: when our floating profit reaches 1 times ATR, we choose a small recent low point and increase the lowest price by 0.05 times ATR according to the number of days we hold the position. Still taking the GBPUSD above as an example, assuming we have held positions for 20 days, then we will increase the stop loss by 20*0.05=1, that is, increase the stop loss to 1.29878+(20*0.05*ATR), since the current ATR is 0.0072, Therefore, the stop loss is raised to 1.29878+(20*0.05*0.0072)=1.30598. But if the price formed a new low during the rise, such as 1.29822, then our stop loss would be raised to 1.29822+(20*0.05*ATR), which is 1.30715. This ratchet stop-loss rule can help us minimize stop loss or keep floating profits.

Usage 2: Fund Management

Assuming that we have 10,000 US dollars to invest when we see that the price of GBPUSD and NZDUSD have trading opportunities, how do we balance the position size of the two trading varieties? Some friends may say that both trading varieties are long by 1 lot, but the margin used for trading one lot of GBPUSD is about twice that of NZDUSD, and the rate of return may not be high. At this point, ATR can come in handy. Such a method was used in the famous sea turtle trading rules in history. It allocates funds to the trading product according to the volatility of the trading product. The specific method is 1. First, determine the 20-day ATR of a variety, and then determine the pip value of the trading variety, for example, the pip value of GBPUSD and NZDUSD is 10 U.S. dollars. At this point, first, calculate the volatility in US dollars, that is, point value × ATR. Assuming that the ATR of the two is 0.0106 and 0.0053 at this time, the volatility of GBPUSD and NZDUSD in US dollars is 106*10=1060 USD and 53*10=530 USD. 2. A position opening unit = 1% of account funds ÷ USD-denominated volatility. Assuming that the account fund is 200,000 US dollars, then 1% is 2,000 US dollars. At this time, the opening unit of GBPUSD is 2000 US dollars ÷ 1060 = 1.88 lots, and the opening unit of NZDUSD is 2000 ÷ 530 = 3.77 lots.

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