Hello Guys, today we're going to talk about a very popular indicator.
The Average True Range (ATR).
The Average True Range is a volatility indicator.
Volatility in plain terms means the rate that the exchange rate is moving up or down.
If the exchange rate is moving rapidly then we have high volatility, if it's moving slowly
we have low volatility.
I will talk about how ATR is calculated and how to use it in your trading.
The ATR is an indicator that was developed by Welles Wielder, and if you want you can
check out episode 14 where we talk about some other famous indicator developed by him the
bollinger bands, the RSI and the parabolic SaR.
The indicator is calculated upon the concept of "True Range".
True range is the higer value out of the three following ranges.
(Current High - Current Low), (Current High - Previous Close) and (Current Low - Previous
Close).
We're going to go to cTrader where I am going to show you how the ATR looks like and how
it's usually used in trading.
Let's plot the ATR indicator it's located in "Volatility" it's the first indicator here.
The default periods for ATR is 14 periods.
The amount of periods determine how many of the true ranges will be taken into account
for each point of the indicator.
The indicator shows market volatilty, that means that it's value is rising when volatility
is rising as we can see here on the chart, the volatility is sharpingly rising, remember
the volatility doesn't have a direction it's not long or short, volatility means that there
is sharp movement.
So every time you see in this chart sharp movement, the indicator is rising.
The value of the indicator expresses the volatility range of the period that we have set it for.
I will try to explain the indicator better with an example.
So let's try to set the indicator to 1 periods, 1 period.
Now the indicator will show us the range of each of these candlesticks, because we have
set it to one periods, so there is no average any more.
If we zoom in to this big Candlestick here we're going to see that the indicator's price
is 0.0060 and that means 60 pips, and if we measure the Candlestick we're going to see
that it's exactly 60 pips.
Setting the indicator to the default 14 periods, will show the range of the exchange rate for
the last 14 periods, in this case we have a one hour chart so it's going to be the last
14 hours.
Let's assume that we are trading hourly charts like we have here, and keep our positions
for one day, so it makes more sence to set the periods to 24 periods, because now it
gives us the ATR of every 24 hours for the last day.
Now that I have explained how the indicator works let's talk about how you can use the
indicator in your trading.
The indicator is usually used in order to find out how many pips away you're going to
put your stop loss.
The reason you can do that because of the ATR is because you understand the volatility
of the market so you understand how much the market is supposed to be moving, and you can
set your stop loss outside that range.
Let's go back to cTrader where I am going to show you exactly what I mean.
We see on the chart that the average true range for the currency pair now is 15 pips.
So let's imagine that we are going to enter long here because we an up-trend going, it's
not a very good place to go but anyway, just for the example.
We know that the ATR of the last 24 periods is 15 pips as we see here on the indicator.
So if we put our stop loss into, for example 5 pips, we know that the next 24 hours there
is a very high probability that our stop loss is going to be hit.
If we put our stop loss to exactly 15 pips, we know that we are at the edge of the range,
and there is a probability that it's going to be hit, maybe it's going to be hit, maybe
not.
If we put it even more like 20 or 25 pips then there is a low probability that it's
going to be hit, next 24 hours, based of course on the previous data.
There is no correct placement of the stop loss, it depends on your trading system, your
risk to reward ratio and how much time you expect to hold your position.
For more information in placing stop losses please check out episode 4, Forex Risk Management.
For this specific example I see that the ATR as we have said before is 15 pips.
In my system I am using 1:2 risk to reward ratio so based on that information, I will
place my stop loss at 1 or 1.5 time of the ATR which is around 20 pips, 23 actually and
I am going to place my take profit at 1:2 risk to reward ratio at 46 pips.
There is no correct ratio multiplier to use for the ATR it all depends on your trading
system and what you want to do.
Other traders use 2 times, they multiply by 2 times or 3 times, other traders like to
divide it by half.
Anyway now that we have covered how we are using the ATR stop loss, let's talk about
another famous way of using ATR as a trailing stop.
A trailing stop is a stop loss order that follows the spot price from a specific distance
and only moves with the direction of your order.
In this chart here, that we see we have a trend, let's assume that this is our trailing
stop.
What the trailing stop will do is it's going to follow the price on a specific range, let's
say that the range is 11 pips like here.
So it's going to be following the price 11 pips, the price is going to be going up, and
the trailing stop is going to be going up with the price.
However the trailing stop is not going to be going down when the price goes down because
it moves only with the direction of the trend or the direction of your order.
So at some point, here, it's going to move 11 pips from the price, so let's say that
it's at this point, and you see the price is going to go up, then the price is going
to go down and it's going to hit your stop loss.
However in this case your stop loss acts more like a take profit because you're going to
get from here to here.
You're going to get this amount of pips.
And if we enter again here, the trailing stop is going to continue going up and it's going
to be hit again here.
So you understand what a trailing stop is.
cTrader features a pretty solid advanced trailing stop, so let me show you how to use the cTrader's
trailing stop, if we make a position, we created an order it's filled it's got to a position,
if we click here this shield icon, we're going to go to advanced stop loss here, we have
a trailing stop loss.
We have two parameters here, trigger when gaining, you specify here how many pips your
position must be winning, for the trailing stop to start trailing, and trail for.
You specify here how many pips below the spot price, or above the spot price, the stop loss
will remain.
Se let's close the standard trailing stop for cTrader, we're going to do a video about
advanced protection in the future for sure, and let's go back to the ATR.
To use it we will download the indicator "Chandelier Exit" from cTDN.
Chandelier Exit was developed by Charles de Bau and it uses the formula of the ATR to
provide a trailing stop for your positions.
It's very easy to download custom indicators from cTDN, all you have to do is go to your
function, indicators button, and search for the indicator you want to download.
You see here if the indicator is not found on your local indicators, it's going to show
you results from cTrader Developer's Network, so you're going to see Chandelier Exit here,
then click it, the cTDN page is going to open, just click the download button, then we run
the indicator that we have downloaded, press "yes" and the indicator has been installed,
you don't need to restart the application or anything.
So go to your, after you install it, go to your custom and load the indicator, and set
the periods and the multiplier.
The default periods is 22 periods for the Chandelier Exit, and the default multiplier
is 3 however you can play with the settings and use something that suits your trading
system better I prefer 4 multiplier for example, and now let's plot the indicator.
Now you see that there are some red dots and blue dots that are plotted.
These red and blue dots are the points that you will place your stop loss.
As all trailing stops the chandelier trailing stop works better in a trend so, if you enter
your position here for example, we see how the trailing stop is going to work so, let's
create a limit order, so I can show you an example.
So let's assume that you have created this position and we have created on this trend
bar, so we're going to place, the stop loss is going to be placed exactly on the Chandelier
Exit.
The blue line is for long positions, the blue dots, and the red dots are for short positions.
So the trailing stop, you're going to be moving your trailing stop exactly on the Chandelier
Exit dot as the price is moving.
So you're going to see you're going to be moving it here, here, here this dot, this
dot, this dot, any new Candlestick that comes up you're going to be moving it, and in this
point exactly, the trailing stop is going to be hit, because, the trailing stop only
moves with the direction of the trend, not at the other side.
So here it's going to be hit by this candlestick, so you got all this and that's pretty cool.
If you open a new position again, here you're going to be trailing with a chandelier trailing
stop like that.
In today's video we talked about the average true range indicator and it's properties.
I showed you how the average true range looks, how it's calculated and how to use it in your
trading.
I also showed the chandelier exit and how to use it for trailing stops.
In the next videos we're going to talk about some famous oscillators, like stochastic,
and if you liked this video don't forget to subscribe and if you want, share it with your
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Thanks for watching.