Forex Technical Analysis based on experience and research.

Using the ATR in your advantage

This article will mention the strategy based on taking long positions. All the information can also be interpreted for taking short positions.

In this article I will explain how I look towards the ATR in my trading. If you don't know what the ATR indicator is then it is best that you do a search on the web to find out. There is a lot of information available and if you understand the basics then please continue to read this article.

The ATR does not tell anything about the direction but it helps to determine for how many pips you should go over a period of time. The indicator is lagging and if you want to take this into account and be on the safe side you can always deduct a certain percentage. However, because it is lagging it can work both ways, in your advantage or not depending on the current price movements.

I use a method that I trust upon and it does not matter so much that the ATR is lagging. I got to this method after research, reading and seeing on YouTube many ways of people using the ATR. The basic way can be found everywhere and is simply based on a part or multiple times an ATR. I will explain here how I believe you can use the ATR in the best way.

To make things simple we take a currency pair with a weekly ATR(14) of 100. We also assume that we would like to make weekly profits when positions are taken there where the price action is.
  • If you take a long (short) position and the pair is not going anywhere then the chances are high that it may move around 1/2 ATR, so 50 pips, in both ways.
  • If the pair has a certain direction, let's assume it goes up, then the chances are higher that the high of the week will be more than 1/2 ATR, 50 pips, from the previous close.
Taking a profit of 1/2 ATR, so 50 pips, seems to be the right choice and in the last case it will more than compensate the fact that the ATR is lagging because the price may move up to 1 ATR, 100 pips, in that direction or in a bad case a bit less based on the current price movements.

The clue is that if you got the direction correct and you go for 1/2 ATR your chances are higher to make profit in one week. In theory this should be a chance of 66%, 2 out of 3.
Price can go:
Up(1) and the profit can be 100 Pips
Neutral(2) and the profit can be 50 Pips
Down(3) and the loss can be up to 100 Pips depending on your stop loss.

The roughly explained method here is a part of the strategy that I am currently using for the FxTaTrader system. This method is not used on its own because e.g. money management also plays an important role in the whole. The risks can be high depending on the stop loss placed and experience determining the direction. Although the explanation may seem simple and clear there is always risk involved. I added a disclaimer to my blog for this purpose.

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