Using Average True Range (ATR) to Place Stop Losses

Discussion in 'Forex Trading' started by LearningMarkets, Aug 22, 2008.

  1. LearningMarkets

    LearningMarkets ET Sponsor

    The Average True Range (ATR) indicator is, at its core, a volatility indicator. It tells you the average price swings, or trading "range," of the currency pair you are analyzing. If the currency pair you are watching is generally a volatile one, or is just going through a volatile period, the level of the ATR will be higher because volatility is higher. If the currency pair you are watching is generally a stable one, or is just going trough a period or relative stability, the level of the ATR will be lower because volatility is lower.

    Many traders like to use the ATR in determining their stop losses because the indicator does take volatility into account---which tends to give the currency pair more room to move. They figure that you should be able to use tighter stop losses on stable currency pairs and wider stop losses on volatile currency pairs, and the ATR helps them determine which is which.

    Here's how traders typically use the ATR to help them determine where to place your stop-loss order. If they are long a currency pair, they will find the high point the currency pair has reached since they entered the trade, and they will subtract the current value of the ATR (or a multiple thereof) from that high point. This gives them the price level at which they will set their stop loss. If the price then turns around and hits their stop loss, they will exit the trade.

    If they are short a currency pair, they will find the low point the currency pair has reached since they entered the trade, and they will add the current value of the ATR (or a multiple thereof) to that low point. This gives them the price level at which they will set their stop loss. If the price then turns around and hits their stop loss, they will exit the trade.

    Check out the video below to learn more about using the Average True Range (ATR) indicator for setting stop losses.

    http://www.pfxglobal.com/forex-video-archives/setting-stop-losses-using-average-true-range-atr.html
     
  2. Everyone wants their pound of flesh from the fx market......ahhhhhh!